Annual Report - 2005 · Vítor Manuel da Silva Rodrigues Pessoa José António da Silveira Godinho (1) Appointed by Resolution of the Council of Ministers no. 51/2006 ... Emílio

Annual Report

Report and Financial Statements

2005

Lisbon 2006

Banco de Portugal E U R O S Y S T E M

BANCO DE PORTUGAL

Economic Research Department

Control and Accounting Department

Distribution

Administrative Services Department

Documentation, Editing and Museum Division

Av. Almirante Reis, 71

1150-012 Lisboa

Printing

Tipografia Peres, S.A.

Lisbon, 2006

Number of copies

1750 issues

Legal Deposit nº 228138 / 05

ISBN 972 - 9479 - 93 - 3

ISSN 0870-0079

MANAGEMENT OF THE BANK

Governor

Vítor Manuel Ribeiro Constâncio

Board of Directors

Governor


Vice-Governors

José Agostinho Martins de Matos

Pedro Duarte Neves(1)

Directors

Manuel Ramos de Sousa Sebastião

Vítor Manuel da Silva Rodrigues Pessoa

José António da Silveira Godinho

(1) Appointed by Resolution of the Council of Ministers no. 51/2006 (Series II) of 27 April 2006, published in the Official Gazette(Series II), no. 91, of 11 May 2006.

Board of Auditors

Chairman

Emílio Rui da Veiga Peixoto Vilar

Members

Rui José da Conceição Nunes

Sérgio António Gonçalves Nunes(2)

Amável Alberto Freixo Calhau(3)

Board of Consultants


Pedro Duarte Neves(4)

José Agostinho Martins de Matos

Manuel Jacinto Nunes

José da Silva Lopes

José Alberto Vasconcelos Tavares Moreira

Luís Miguel Couceiro Pizarro Beleza

António José Fernandes de Sousa

Emílio Rui da Veiga Peixoto Vilar

Miguel Ribeiro Cadilhe

Valentim Xavier Pintado

Almerindo da Silva Marques

João Maurício Fernandes Salgueiro

Alberto Manuel Sarmento Azevedo Soares(5)

Roberto de Sousa Rocha Amaral

Rui Manuel Teixeira Gonçalves

(2) Elected employees' representative to the Board of Auditors, in compliance with the Statement no. 82/2006 (Series II) of 2 May ofthe Office of the Minister of State and Finance, published in Official Gazette no. 98 (Series II) of 22 May 2006 .

(3) Appointed by Decision no. 12230/2006 (Series II) of 11 May of the Minister of State and Finance, published in the OfficialGazette no. 113 (Series II) of 12 June 2006, performing is duties as official accountant.

(4) Appointed by Resolution of the Council of Ministers no. 51/2006 (Series II) of 27 April 2006, published in the Official Gazette(Series II), no. 91, of 11 May 2006.

(5) Appointed by Resolution no. 2/2006 (Series II) of 12 January 2006, published in the Official Gazette (Series II) no. 18, of 25January 2006.

HEADS OF DEPARTMENT,REGIONAL DELEGATIONS AND DISTRICT AGENCIES

Office of the Governor and the Boards (GAB)

Paulo Ernesto Carvalho Amorim

Secretariat (SEC)


Audit Department (DAU)

José Cunha Nunes Pereira

Control and Accounting Department (DCC)

Vitor Manuel G. Pimenta e Silva

Treasury and Issue Department (DET)

Manuel Pimentel Castelhano

Statistics Department (DDE)

João António Cadete de Matos

Economic Research Department (DEE)

Ana Cristina de Sousa Leal

Human Resources Management and Development Department (DRH)

António Pinto Pereira

Market and Reserve Management Department (DMR)

Rui Manuel F. Rodrigues Carvalho

Organisation and Information Systems and Technology Department (DOI)

Paulino A. M. Magalhães Corrêa

International Relations Department (DRI)


Administrative Services Department (DSA)

Henrique Möller Miranda

Legal Services Department (DJU)

José Gabriel Cortez Rodrigues Queiró

Payment Systems Department (DPG)

Eugénio Fernandes Gaspar

Banking Supervision Department (DSB)

Carlos Eduardo Lemos Santos

Pension Fund

Helena Maria Martins Adegas

Oporto Branch

Manuel Maia Marques

Regional Delegations

Regional Delegation of the Azores

Egberto T. Bettencourt Mendes

Regional Delegation of Madeira

Vítor Manuel Geraldes Ribeiro

District Agencies

Braga

Maria Heliodora V. Geraldes Matos

Castelo Branco

Maria João Botelho Simões Raposo de Sousa

Coimbra

António Albuquerque

Évora

Casimiro José Andrade Veloso

Faro

Abel Pereira Correia

Vila Real

João Reis Cariano

Viseu

João Maria Albuquerque Beirão

CONTENTS

CONTENTS

Management of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V

Board of Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII

Heads of Departments, Regional Delegations, District Agencies and Delegations

Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI

PART I. THE PORTUGUESE ECONOMY IN 2005

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 1. International Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Box 1.1. Intensification of the Globalisation Process . . . . . . . . . . . . . . . . . . . . . . 23

Box 1.2. Growth and Inflation Differentials in the Euro Area . . . . . . . . . . . . . . . . . 27

Chapter 2. Economic Policies and Structural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

2.1. The Monetary Policy of the ECB and Monetary and Financial Conditions of

the Portuguese Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

2.2. Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2.3. Structural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Box 2.1. The 2005 Budgetary Outturn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Box 2.2. The Fiscal Effects of Population Ageing . . . . . . . . . . . . . . . . . . . . . . . . . 56

Box 2.3. Portuguese Export Market Share: An Analysis in the Main Export

Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Box 2.4. Pricing Behaviour in Portugal: Microeconomic Evidence . . . . . . . . . . . . 63

Box 2.5. Work Incentives and the Generosity of Unemployment Benefits . . . . . . . 65

Box 2.6. Public Policies Supporting Job Seeking and Unemployment Duration . . 68

Box 2.7. Developments in the Structure of the Retail Trade Sector in Portugal . . 71

Chapter 3. Output, Expenditure and External Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 75

3.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

3.2. Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

3.3. Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Annual Report 2005 | Banco de Portugal

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3.4. Current and Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Box 3.1. The base 2000 of Portuguese National Accounts . . . . . . . . . . . . . . . . . 88

Chapter 4. Employment and Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

4.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

4.2. Employment and Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

4.3. Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Chapter 5. Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Chapter 6. Public Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

6.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

6.2. Current Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

6.3. Current Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

6.4. Capital Revenue and Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

6.5. Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Box 6.1. A Disaggregated Framework for the Analysis of Public Finances . . . . . . 113

Chapter 7. Financial Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

7.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

7.2. Financial Account and International Investment Position . . . . . . . . . . . . . . . 118

7.3. Securities Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

7.4. Non-financial Resident Institutional Sectors . . . . . . . . . . . . . . . . . . . . . . . . . 124

7.4.1. Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

7.4.2. Non-financial Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

7.4.3. General Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

7.5. Financial Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Box 7.1. Financial Intermediation Margin in Portugal . . . . . . . . . . . . . . . . . . . . . . 140

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PART II. REPORT AND FINANCIAL STATEMENTS

Chapter 8. Activities of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

8.1. Supervision of credit institutions and financial companies, the Guarantee of

Deposits and the Mutual Agricultural Credit Guarantee Fund . . . . . . . . . . . . 215

8.1.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

8.1.2. Regulatory framework governing the activity of institutions and

supervisory functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

8.1.3. Supervisory activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

8.1.3.1. Developments in the universe of institutions . . . . . . . . . . . . . . . . . 219

8.1.3.2. Monitoring of institutions and financial groups . . . . . . . . . . . . . . . . 220

8.1.4. Consultancy, research and information management activities . . . . . . . 221

8.1.5. Claims and breaches of regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

8.1.6. Co-operation with other supervisory authorities and international activity . 224

8.1.7. Deposit Guarantee Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

8.1.8. Mutual Agricultural Credit Guarantee Fund . . . . . . . . . . . . . . . . . . . . . . . 226

8.2. Currency issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

8.2.1. Banknote issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

8.2.2. Metal coins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

8.3. Payment systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

8.3.1. Gross settlement systems: SPGT/TARGET . . . . . . . . . . . . . . . . . . . . . . 245

8.3.2. Interbank clearing system (SICOI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

8.3.3. Regulation and control of means of payment . . . . . . . . . . . . . . . . . . . . . 248

8.4. Monetary policy operations and management of the European Central Banks’

foreign reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

8.4.1. Implementation of the single monetary policy . . . . . . . . . . . . . . . . . . . . . 250

8.4.1.1. Liquidity management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

8.4.1.2. Open market operations and standing facilities . . . . . . . . . . . . . . . 252

8.4.1.3. Euro money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

8.4.1.4. Minimum reserve system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

8.4.1.5. Eligible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

8.4.1.6. Review of the Eurosystem collateral framework . . . . . . . . . . . . . . . 257

8.4.2. Management of the European Central Bank’s (ECB) foreign reserves . . 258

8.5. Analysis and research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

8.6. Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259


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8.7. International Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

8.8. Financial activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

8.8.1. Management of the Banco de Portugal’s own investment assets . . . . . . 270

8.8.2. Financial relations with the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

8.9. Exchange authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

8.10. Internal organisation and management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

8.10.1. Human resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

8.10.2. Pension Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274

8.10.3. Organisation and information technology . . . . . . . . . . . . . . . . . . . . . . . . 275

8.10.4. Information and documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

8.10.5. Legal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

8.10.6. Internal audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279

8.10.7. Buildings and technical facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281

Chapter 9. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

9.1. Presentation and proposal for the distribution of results . . . . . . . . . . . . . . . . 283

9.2. Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

9.3. Notes on the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

9.4. External Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

9.5. Report and opinion of the Board of Auditors . . . . . . . . . . . . . . . . . . . . . . . . . 323


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TABLES


Overview

1 Portugal – Main economic indicators 2003-2005 . . . . . . . . . . . . . . . . . . 9

Chapter 1. International Environment

1.1 Gross domestic product and inflation, per cent . . . . . . . . . . . . . . . . . . . . 11

1.2 Developments in international tourism . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.3 External demand for Portuguese goods, rate of change in volume, per

cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.4 International financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Box 1.1. Intensification the Globalisation Process

[1] Trade of goods and services, rate of change in volume, per cent . . . . . . 24

Chapter 2. Economic Policies and Structural Issues

2.1 Interest rates of the European Central Bank, per cent . . . . . . . . . . . . . . 31

2.2 Euro area – Exchange and interest rates . . . . . . . . . . . . . . . . . . . . . . . . 33

2.3 Euro area – Monetary and credit aggregates, year-on-year rates of

change, per cent, end-of-period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.4 Monetary and financial conditions of the Portuguese economy, average

values in the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

2.5 Loans granted by other monetary financial institutions to non-financial

corporations, breakdown by sector, annual rate of change at end-period . 39

2.6 Main fiscal indicators, as a percentage of GDP . . . . . . . . . . . . . . . . . . . 40

2.7 Developments in cyclically adjusted primary current expenditure and tax

revenue, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

2.8 Employment, gross value added and sectoral productivity . . . . . . . . . . . 49

Box 2.1. The 2005 Budgetary Outturn

[1] General government accounts (national accounts), EUR millions . . . . . . 54


Markets

[1] Market share of Portuguese manufacturing exports, in nominal terms . . 58

[2] Market share in the 20 markets where Portuguese exports recorded the

highest losses, change between 1999 e 2005, in percentage points . . . 60

[3] Correlation with Portuguese export market shares in the 96 selected

markets, correlation coefficients, based on average values (1999-2005) 62

Box 2.4. Pricing Behaviour in Portugal: Microeconomic Evidence


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XXI

[1] Monthly frequency of changes in consumer prices, as a percentage;

based on data for a restricted group of 50 items . . . . . . . . . . . . . . . . . . . 63

[2] Qualitative evidence on price reviews, as a percentage of total firms . . . 64

Box 2.6. Public Policies Supporting Job Seeking and Unemployment Duration

[1] Summary statistics of the characteristics of registered individuals, by

analysis group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

[2] Impact of the activation programmes on unemployment duration, in

months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Chapter 3. Output, Expenditure and External Accounts

3.1 GDP and main expenditure components, real rate of change, per cent . 75

3.2 Gross value added by sector of activity, real rate of change, per cent . . 78

3.3 Household disposable income, nominal rate of change, per cent . . . . . . 80

3.4 Current account and capital account, as a percentage of GDP . . . . . . . 85

3.5 Net lending(+) / net borrowing(-) by sector, as a percentage of GDP . . . 86

Box 3.1. The base 2000 of Portuguese National Accounts

[1 (A)] Revisions of GDP and main expenditure components, revisions of

levels at current prices (base 2000 - base 1995), EUR millions . . . . . . . 90

[1 (B)] Revisions of GDP and main expenditure components, revisions of

levels at current prices (base 2000 - base 1995), per cent . . . . . . . . . . . 90

Chapter 4. Employment and Wages

4.1 Population, employment, unemployment and wages, year-on-year rate

of change, unless otherwise indicated, per cent . . . . . . . . . . . . . . . . . . . 91

4.2 Breakdown of employment by employment status and by type of

contract, rate of change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

4.3 Employment, hours worked and average working hours, year-on-year

rates of change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

4.4 Quarterly average inflows and outflows between labour market states,

as a percentage of the labour force . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

4.5 Youth unemployment rate by level of education (aged 15-24), per cent . 96

4.6 Breakdown of the stock of unemployed persons by reasons for job

seeking, per cent of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

4.7 Labour mobility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97


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Chapter 5. Prices

5.1 HICP – Main classes and aggregates, rate of change, per cent . . . . . . . 102

5.2 Portugal – Main international price indicators, rate of change, per cent . 102

Chapter 6. Public Finances

6.1 Main fiscal indicators, as a percentage of GDP . . . . . . . . . . . . . . . . . . . 105

6.2 General government current revenue, excluding temporary measures . . 106

6.3 General government current expenditure . . . . . . . . . . . . . . . . . . . . . . . . 108

6.4 General government capital revenue and expenditure, excluding

temporary measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

6.5 Breakdown of the change in the general government debt ratio, as a

percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

6.6 General government deficit-debt adjustments, as a percentage of GDP 111

Box 6.1 A Disaggregated Framework for the Analysis of Public Finances

[1] Change in general government revenue and expenditure, adjusted for

the effects of the economic cycle and temporary measures, as a

percentage of nominal trend GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Chapter 7. Financial Situation

7.1 Financial account, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . 119

7.2 International investment position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

7.3 Issuance of securities in the external and internal markets by institutional

sector, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

7.4 Net issuance of securities by residents in the external and internal

markets by type of instrument, as a percentage of GDP . . . . . . . . . . . . . 124

7.5 Main indicators of the banking system, consolidated basis, per cent . . . 133

7.6 Banking system balance sheet, on a consolidated basis, EUR millions . 135

Profit and loss account, consolidated basis, EUR millions . . . . . . . . . . . 135

7.7 Funds raised by resident institutional investors, EUR millions . . . . . . . . 138

Supplementary Tables


Chapter 8. Activities of the Bank

Breaches of regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

Degree of coverage of deposits under the guarantee . . . . . . . . . . . . . . . 225

Institutions registered as at 31 December 2005 . . . . . . . . . . . . . . . . . . . 227

Registrations in 2005 (new institutions) . . . . . . . . . . . . . . . . . . . . . . . . . . 228


Contents

XXIII

Cancellations in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Developments in banknotes put into circulation 2004-2005 . . . . . . . . . . 231

Average value of banknotes in circulation . . . . . . . . . . . . . . . . . . . . . . . . 232

Withdrawals at ATMs 2004-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Migration ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Developments in deposits 2004-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

Developments in withdrawals 2004-2005 . . . . . . . . . . . . . . . . . . . . . . . . 235

Banknotes denominated in escudos 2005 . . . . . . . . . . . . . . . . . . . . . . . 236

Banknotes processed by sorting systems 2004-2005 . . . . . . . . . . . . . . . 238

Unfit rate 2004-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

Counterfeit banknotes detected in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . 239

Developments in circulation 2004-2005 . . . . . . . . . . . . . . . . . . . . . . . . . 241

Status of euro coins issued as at 31.12.05 . . . . . . . . . . . . . . . . . . . . . . . 243

Operations processed via SPGT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Operations processed via SICOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

Staff development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

Professional categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

Contractual groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

Age group development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

Seniority development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273

Level of education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273

Retirees and pensioners development pattern . . . . . . . . . . . . . . . . . . . . 273

Professional training development pattern . . . . . . . . . . . . . . . . . . . . . . . 273

Financial standing of the Pension Fund as at the end of the year . . . . . . 274

Exclusively domestic internal audit activity . . . . . . . . . . . . . . . . . . . . . . . 280

Chapter 9. Financial Statements

Balance sheet of Banco de Portugal – Year-end positions . . . . . . . . . . . 283

Developments in the profit and loss account . . . . . . . . . . . . . . . . . . . . . . 287

Balance sheet of the Banco de Portugal as at 31 December 2005 . . . . . 290

Profit and loss account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292

Note 1: Bases of presentation and main accounting policies . . . . . . . . . . . . . . . . 293

Note 2: Gold and gold receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Note 3: Lending and deposit operations with the International Monetary Fund

(IMF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Note 4: Balances with banks, security investments and other assets

denominated in foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301

Note 5: Balances with banks, security investments and other assets

denominated in euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302


Contents

XXIV

Note 6: Lending to euro area credit institutions related to monetary policy

operations denominated in euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302

Note 7: Intra-Eurosystem claims and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 303

Note 8: Tangible and intangible fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304

Note 9: Other Financial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

Note 10: Off-balance-sheet instrument revaluation differences . . . . . . . . . . . . . . . 306

Note 11: Accruals and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306

Note 12: Other assets – Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

Note 13: Banknotes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

Note 14: Liabilities to euro area credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . 308

Note 15: Liabilities to other euro area residents denominated in euro . . . . . . . . . . 308

Note 16: Liabilities to non-euro area residents denominated in euro . . . . . . . . . . . 308

Note 17: Liabilities to euro area and non-euro area residents denominated in

foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

Note 18: Accruals and income collected in advance . . . . . . . . . . . . . . . . . . . . . . . 309

Note 19: Other liabilities – Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

Note 20: Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310

Note 21: Revaluation differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

Note 22: Capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

Note 23: Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312

Note 24: Realised gains/losses arising from financial operations . . . . . . . . . . . . . 313

Note 25: Write-downs on financial assets and positions . . . . . . . . . . . . . . . . . . . . 313

Note 26: Income from equity shares and participating interests . . . . . . . . . . . . . . 313

Note 27: Net result of pooling of monetary income . . . . . . . . . . . . . . . . . . . . . . . . 314

Note 28: Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

Note 29: Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315

Note 30: Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315

Note 31: Off-balance-sheet instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315

Note 32: Retirement and survivors pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316


Contents

XXV

CHARTS



1.1 World GDP and trade, real rate of change . . . . . . . . . . . . . . . . . . . . . . . 12

1.2 Current account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

1.3 International commodity prices, in USD . . . . . . . . . . . . . . . . . . . . . . . . . 12

1.4 Exports of goods and services, volume . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.5 Foreign direct investment, net inflows . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.6 Contributions to world GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.7 Major euro area economies – GDP and expenditure components,

year-on-year rate of change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

1.8 Yields on 10-year bonds, monthly averages . . . . . . . . . . . . . . . . . . . . . . 20

1.9 Spreads between government and private debt bond yields . . . . . . . . . . 21

1.10 International debt instruments issued by emerging market economies,

net issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Emerging market debt spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Box 1.1. Intensification the Globalisation Process

[1] Trade and financial openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

[2] World trade and GDP, in volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

[3] Foreign direct investment, total as a percentage of world GDP . . . . . . . 24

[4] Foreign direct investment inflows, as a percentage of world total . . . . . . 25

[5] World exports of services, annual average change 1996-2003 . . . . . . . . 25

Box 1.2. Growth and Inflation Differentials in the Euro Area

[1] Dispersion of the year-on-year rate of change of GDP across euro area

countries, (weighted standard deviation) . . . . . . . . . . . . . . . . . . . . . . . . . 27

Dispersion of the year-on-year rate of change of the HICP across euro

area countries, (weighted standard deviation) . . . . . . . . . . . . . . . . . . . . . 27

[2] GDP growth rate – Differential vis-à-vis the euro area . . . . . . . . . . . . . . 28

HICP annual rate of change – Differential vis-à-vis the euro area . . . . . . 28

[3] Real exchange rate vis-à-vis the other euro area 11 countries, based on

the HICP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28


Contents

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[4] Euro area countries

Developments of the real exchange rate and exports 2000-2005 average 30

Developments of the real exchange rate and domestic demand

2000-2005 average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Developments of the real exchange rate and private consumption,

2000-2005 average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Developments of the real exchange rate and GFCF, 2000-2005 average . 30


2.1 Eurosystem projections – assumptions for the oil price . . . . . . . . . . . . . 32

Eurosystem projections – assumptions for the nominal effective

exchange rate of the euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Eurosystem projections – GDP growth, range and mid-point of the

projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Eurosystem projections – inflation, range and mid-point of the projection . 32

2.2 Factors behind the demand for loans in the euro area

Non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Households (for house purchase) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.3 Contribution of monetary conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

2.4 Key interest rates and money market bank lending rates . . . . . . . . . . . . 37

2.5 Interest rate margins on loans for house purchase . . . . . . . . . . . . . . . . . 37

2.6 Credit standards applied to the approval of loans to non-financial

corporations and main determining factors . . . . . . . . . . . . . . . . . . . . . . . 37

2.7 Credit standards applied to the approval of loans to households for

house purchase and main determining factors . . . . . . . . . . . . . . . . . . . . 37

2.8 Loans granted by resident credit institutions to households, annual rate of

change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Credit granted to non-financial corporations, annual rate of change . . . . 38

2.9 Yields of the Portuguese government debt and spread vis-à-vis German

government debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

2.10 Overall balance and underlying balance of general government in

Portugal and overall balance of general government in the euro area . . 40

2.11 Change in cyclically adjusted revenue and primary expenditure,

excluding temporary measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2.12 Cyclically adjusted tax revenue and primary current expenditure in

Portugal and the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2.13 Change in the debt ratio in Portugal and the euro area . . . . . . . . . . . . . . 42

2.14 Objectives for the budget balance in updated stability and growth

programmes and actual budget balance . . . . . . . . . . . . . . . . . . . . . . . . . 43

2.15 GDP growth rates and GDP per capita . . . . . . . . . . . . . . . . . . . . . . . . . 44

2.16 GDP per capita in Portugal, purchasing power parities . . . . . . . . . . . . . . 44


Contents

XXVII

2.17 Level of productivity per hour worked, 2004 . . . . . . . . . . . . . . . . . . . . . . 45

2.18 Labour productivity in the Portuguese economy, rates of change . . . . . . 45

2.19 Labour productivity in the private sector, rates of change . . . . . . . . . . . . 46

2.20 Growth of labour productivity in manufacturing and market services,

(1995-2003 average) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

2.21 Sectoral developments in the Portuguese economy, 1997-2000

average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

2.22 Sectoral developments in the Portuguese economy, 2001-2003

average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

2.23 Administrative regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

2.24 Economic regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

2.25 Weight of the trade sector in GVA and employment, 2003 . . . . . . . . . . . 51

Box 2.2. The Fiscal Effects of Population Ageing

[1] Projections for the old-age dependency ratio . . . . . . . . . . . . . . . . . . . . . 56

[2] Fertility rate and average life expectancy at birth in Portugal . . . . . . . . . 56


Markets

[1] Breakdown of in the total change of market share of Portuguese

manufacturing exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

[2] Growth of destination markets and Portuguese export market share

(2000-2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

[3] Portuguese export market share losses (2000-2005) . . . . . . . . . . . . . . . 61

Box 2.5. Work Incentives and the Generosity of Unemployment Benefits

[1] Net replacement rates for a couple with 2 children, (one employed

family member, one member entitled to unemployment benefits) . . . . . . 66

Box 2.7. Developments in the Structure of the Retail Trade Sector in Portugal

[1] Regulation index in the retail trade sector . . . . . . . . . . . . . . . . . . . . . . . . 72

[2] Change in the number of retail outlets, breakdown by display and sale

area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

[3] Structure of food retail turnover by type of establishment . . . . . . . . . . . . 73

[4] Change in the number of large retail establishments with an area

exceeding 1500 sq m . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73


3.1 Gross domestic product, year-on-year rate of change . . . . . . . . . . . . . . 76

3.2 Gross domestic product in Portugal and in the euro area, year-on-year

rate of change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

3.3 Employment and gross value added in the services and manufacturing

sectors 1999-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79


Contents

XXVIII

3.4 Private consumption coincident indicator and consumer confidence

indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3.5 Developments in investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3.6 Market share of Portuguese exports of goods - in volume . . . . . . . . . . . 83

3.7 Effective exchange rate indices for Portugal . . . . . . . . . . . . . . . . . . . . . . . . 83

3.8 Change in the market share of goods exports in major markets, nominal

figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

3.9 Contributions to the nominal growth of goods exports in 2005 . . . . . . . . 84

3.10 Rate of import penetration of goods and services, rate of change . . . . . 84

3.11 Investment, domestic savings and financing capacity of the economy, as

a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

3.12 Savings and investment (private sector and general government), as a


3.13 Breakdown of the change in the goods account . . . . . . . . . . . . . . . . . . . 87

Box 3.1. The base 2000 of Portuguese National Accounts

[1] Gross domestic product, current prices . . . . . . . . . . . . . . . . . . . . . . . . . . 89

[2] Gross domestic product, real rate of change . . . . . . . . . . . . . . . . . . . . . 89


4.1 Output gap and unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

4.2 Total and long-term unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

4.3 Private GDP and private employment growth . . . . . . . . . . . . . . . . . . . . . 92

4.4 Unemployment rate and real wages in the private sector . . . . . . . . . . . . 92

4.5 Contributions to total employment growth by sector . . . . . . . . . . . . . . . . 93

4.6 Developments in total, subsidised and registered unemployment, rate of

change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

4.7 Unemployment rate by regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

4.8 Differential between real wage and productivity growth . . . . . . . . . . . . . 99

4.9 Unit labour costs in the total economy, rate of change . . . . . . . . . . . . . . 99

Chapter 5. Prices

5.1 Harmonised index of consumer prices . . . . . . . . . . . . . . . . . . . . . . . . . . 101

5.2 HICP – Non-energy industrial goods and services, year-on-year rate of

change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

5.3 Inflation differential vis-à-vis the euro area, year-on-year rate of change

of the HICP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104


6.1 Breakdown of the change in the general government debt ratio . . . . . . . 111

6.2 Breakdown of the deficit–debt adjustments . . . . . . . . . . . . . . . . . . . . . . . 111


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XXIX


7.1 Flows of foreign direct investment, excluding Madeira and Santa Maria

(Azores) offshores, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . 120

7.2 International investment position, as a percentage of GDP . . . . . . . . . . 120

7.3 Stock price indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

7.4 Stock market capitalization and transactions . . . . . . . . . . . . . . . . . . . . . 122

7.5 Financial transactions of households . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

7.6 Indebtedness and interest payable, as a percentage of disposable

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

7.7 Developments in households’ demand for loans for house purchase

and key factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

7.8 Developments in households’ demand for consumer credit and other

lending and key factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

7.9 Household indebtedness in euro area countries, as a percentage of

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

7.10 Interest receivable and payable by households, as a percentage of

disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

7.11 Operations on household financial assets, as a percentage of GDP . . . 127

7.12 Financial transactions of non-financial corporations, as a percentage of

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

7.13 Total debt of non-financial corporations, as a percentage of GDP . . . . . 129

7.14 Indebtedness of non-financial corporations in euro area countries, as a


7.15 Trends in demand for loans by non-financial corporations . . . . . . . . . . . 130

Factors influencing the demand for loans by non-financial corporations . . 130

7.16 Non-financial corporations, debt to equity ratio . . . . . . . . . . . . . . . . . . . . 131

7.17 Spreads of subordinated securities issued by European banks

(denominated in euro) vis-à-vis treasury bonds . . . . . . . . . . . . . . . . . . . 136

7.18 Gross international bond issuance by branches and subsidiaries

abroad of Portuguese banking groups, by original maturity . . . . . . . . . . 136

7.19 Investment fund yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

7.20 Portfolio of mutual funds and money market funds, development and

structure by type of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

7.21 Portfolio of real-estate funds, development and structure by type of

assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

7.22 Portfolio of pension funds, development and structure by type of assets . . 139

Box 7.1. Financial Intermediation Margin in Portugal

[1] Financial intermediation margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

[2] Intermediation margin and administrative costs . . . . . . . . . . . . . . . . . . . 141

[3] Market interest rate and intermediation margin . . . . . . . . . . . . . . . . . . . . 142


Contents

XXX

[4] Bank credit margin and default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

[5] Credit margins per market segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

PART II. REPORT AND FINANCIAL STATEMENT


Developments in the quantity of banknotes put into circulation – 2005 . . 232

Developments in the value of banknotes put into circulation – 2005 . . . . 232

Structure of banknote circulation (value) – 2005 . . . . . . . . . . . . . . . . . . . 233

Developments in withdrawals and deposits of banknotes – 2005 . . . . . . 234

Developments in total deposits of banknotes . . . . . . . . . . . . . . . . . . . . . 235

Developments in total withdrawals of banknotes – 2005 . . . . . . . . . . . . . 236

Developments in the value of metal coins in circulation - 2005 . . . . . . . . 241

Breakdown of metal coins in circulation – Value 2005 . . . . . . . . . . . . . . 242

Developments in withdrawals and deposits of circulation coins – 2005 . 242

Central Credit Register – Written and personal information

Head-office, Oporto branch and district agencies . . . . . . . . . . . . . . . . . . 261

Assets and liabilities of the pension fund . . . . . . . . . . . . . . . . . . . . . . . . 275


Banknotes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

Monetary policy and intra-Eurosystem liabilities . . . . . . . . . . . . . . . . . . . 285

Exchange rate developments - EUR/USD . . . . . . . . . . . . . . . . . . . . . . . 285

US dollar interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

Euro interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286

Provisions and revaluation differences . . . . . . . . . . . . . . . . . . . . . . . . . . 286

Capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286

Interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

Total administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288


Contents

XXXI

SUPPLEMENTARY TABLES


A.1.1 World economy – Gross domestic product, real rate of change, per cent . 145

A.1.2 World economy – Consumer prices, rate of change, per cent . . . . . . . . 146

A.1.3 World economy – Current account, as a percentage of GDP . . . . . . . . . 147

A.1.4 Advanced economies – Unemployment rate, per cent . . . . . . . . . . . . . . 148

A.1.5 Advanced economies – Public finance indicators, as a percentage of

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149


A.2.1 Interest rates of the European Central Bank, per cent . . . . . . . . . . . . . . 150

A.2.2 Monetary and financial conditions of the Portuguese economy, average

values, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

A.2.3 Loans granted by other monetary financial institutions to non-financial

corporations, breakdown by sector, annual rate of change at end-period . 152

A.2.4 Competitiveness and structural indicators, annual rate of change, in

percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153


A.3.1 Gross value added by sector of activity, real growth rates, per cent . . . . 154

A.3.2 Gross domestic product – Expenditure side, current prices, EUR

millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

A.3.3 Gross domestic product – Expenditure side, real rate of change, per

cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

A.3.4 Gross domestic product – Expenditure side, rate of change in implicit

deflators, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

A.3.5 External demand of goods, Portuguese exports and market share, real

rate of change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

A.3.6 Portuguese exports of goods by main economic categories, nominal


A.3.7 Portuguese exports of goods by main economic categories, real rate of

change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

A.3.8 Portuguese imports of goods by main economic categories, nominal


A.3.9 Portuguese imports of goods by main economic categories, real rate of

change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

A.3.10 Exports of goods by economic zones and countries of destination, per

cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

A.3.11 Imports of goods by economic zones and countries of origin, per cent . . 164

A.3.12 Portuguese exports of goods by groups of products, nominal rate of

change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165


Contents

XXXII

A.3.13 Portuguese imports of goods by groups of products, nominal rate of

change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

A.3.14 Portuguese exports of goods by groups of products, real rate of change,

per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

A.3.15 Portuguese imports of goods by groups of products, real rate of change,

per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

A.3.16 Household disposable income, EUR millions . . . . . . . . . . . . . . . . . . . . . 169

A.3.17 Lending/borrowing requirements by institutional sector, as a percentage

of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

A.3.18 Balance of payments, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

A.3.19 Balance of payments, as a percentage of GDP . . . . . . . . . . . . . . . . . . . 172

A.3.20 Transfers with the European union, EUR millions . . . . . . . . . . . . . . . . . . 173


A.4.1 Employment and unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

A.4.2 Labour costs, average rate of change, per cent . . . . . . . . . . . . . . . . . . . 175

Chapter 5. Prices

A.5.1 Price and non-wage cost indicators, rates of change, per cent . . . . . . . . 176

A.5.2 CPI – Main categories and aggregates, annual average rates of change,

per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

A.5.3 Portugal and euro area – Main HICP aggregates, average rates of

change, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178


A.6.1 General government accounts (national accounting), EUR millions . . . . 179

A.6.2 General government accounts (national accounting), as a percentage of

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

A.6.3 General government accounts (national accounting), rate of change, per

cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

A.6.4 Stock–flow adjustment, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . 182


A.7.1 Financial account, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . 183

A.7.2 International investment position, end-of-period position, EUR millions . 186

A.7.3 International investment position, as a percentage of GDP . . . . . . . . . . 187

A.7.4 Net issuance of securities in the external and internal markets by

institutional sector, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

A.7.5 Net issuance of securities by residents in the external and internal

markets by type of instrument, EUR millions . . . . . . . . . . . . . . . . . . . . . 189


Contents

XXXIII

A.7.6 Gross issuance of medium - and long-term bonds by residents in the

external and internal markets by type of rate

(A) General government, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . 190

(B) Financial institutions, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . 191

(C) Non-financial institutions, EUR millions . . . . . . . . . . . . . . . . . . . . . . . 192

A.7.7 Euronext Lisboa: Turnover of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

A.7.8 Stock market capitalisation as a percentage of GDP, international

comparison, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

A.7.9 Turnover of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

A.7.10 Derivatives stock exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

A.7.11 Institutional investors’ portfolio, end-of-period position, EUR millions . . . 197

A.7.12 Flows of funds in the Portuguese economy, consolidated values in

2004, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

A.7.13 Financial transactions of households, consolidated values, EUR

millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

A.7.14 Financial assets and liabilities of households, consolidated values;

end-of-period, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

A.7.15 Financial transactions of non-financial corporations, consolidated

values, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

A.7.16 Financial assets and liabilities of non-financial corporations,

consolidated values; end-of-period, EUR millions . . . . . . . . . . . . . . . . . . 203

A.7.17 Financial transactions of the general government, consolidated values,

EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

A.7.18 Financial assets and liabilities of the general government, consolidated

values; end-of-period, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

A.7.19 General government debt by instruments and by holding sectors, EUR

millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

A.7.20 Financial transactions of the financial sector, consolidated values, EUR

millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

A.7.21 Financial transactions of the sub-sectors of the financial sector,

consolidated values, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

A.7.22 Financial assets and liabilities of financial corporations, consolidated

values; end-of-period, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

A.7.23 Financial transactions with the external sector, consolidated values,

EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211


Contents

XXXIV


Abbreviations

XXXV

COUNTRIES

AT Austria

BE Belgium

CA Canada

CH Switzerland

CY Cyprus

CZ Czech Republic

DE Germany

DK Denmark

EE Estonia, Republic of

ES Spain

FI Finland

FR France

GR Greece

HU Hungary

IE Ireland

IS Iceland

IT Italy

JP Japan

KR Korea, Republic of

LT Lithuania, Republic of

LU Luxembourg

LV Latvia, Republic of

MT Malta

MX Mexico

NL Netherlands, Kingdom of the Nether-

lands

NO Norway

NZ New Zealand

PL Poland, Republic of

PT Portugal

SE Sweden

SI Slovenia, Republic of

SK Slovak Republic

UK United Kingdom

US United States

OTHER

ADSE Assistência na Doença aos

Servidores do Estado (Director-

ate-General for the Protection of Civil

Servants)

APFIPP Associação Portuguesa de Fundos

de Investimento, Pensões e

Patrimónios

arc average rate of change

b.p. basis points

CGA Caixa Geral de Aposentações

CHF Swiss Franc

CIS Community of Independent States

CMVM Comissão do Mercado de Valores

Mobiliários

CNY Renminbi

CPI Consumer Price Index

EA Euro area (includes Belgium, Ger-

many, Greece, Spain, France, Ire-

land, Italy, Luxembourg, Netherlands,

Austria, Portugal and Finland)

EAGGF European Agricultural Guidance and

Guarantee Fund

ECB European Central Bank

EDP Excessive Deficit Procedure

EFTA European Free Trade Association

EMBI+ Emerging Markets Bond Index

EONIA Euro Overnight Index Average

ERDF European Regional Development

Fund

ESA European System of Accounts

ESCB European System of Central Banks

ESF European Social Fund

EU European Union

EU15 European Union, 15 Member-States

until 1 May 2004 (euro area + Den-

mark, Sweden and United Kingdom).

EU25 European Union, 25 Member-States

(EU15 + Czech Republic, Estonia,

Cyprus, Latvia, Lithuania, Hungary,

Malta, Poland, Slovenia and Slovak

Republic)

EUR Euro

FDI Foreign Direct Investment

FISIM Financial Intermediation Services In-

directly Measured

FRA Forward Rate Agreement

GBP Great Briton Pound

GDP Gross Domestic Product

GFCF Gross Fixed Capital Formation

GVA Gross Value AddedCountries should be red in alphabetical order

of the abbreviations.


Abbreviations

XXXVI

HICP Harmonized Index of Consumer

Prices

HP Hodrick-Prescott

HWWA Hamburg Institute of International

Economics

IAS International Accounting Standards

IEFP Instituto de Emprego e Formação

Profissional

IGCP Instituto de Gestão do Crédito

Público

IMF International Monetary Fund

INE Instituto Nacional de Estatística

(National Statistics Institute)

IRC Corporate Income Tax

IRS Personal Income Tax

ISP Instituto de Seguros de Portugal

ISP Tax on Oil Products

JPY Japanese Yen

NACE Statistical classification of economic

activities in the European

Community

NCA Adjusted Accounting Standards

OECD Organisation for Economic Cooper-

ation and Development

OFIFA Other Financial Intermediaries and

Financial Auxiliaries

OMFI Other Monetary and Financial Insti-

tutions

OPEC Organization of the Petroleum Ex-

porting Countries

p.p. percentage points

PALOP (Portuguese-speaking African

Countries)

PER Price-to-earnings ratio

PPP Purchasing Power Parities

PSI Portuguese Stock Exchange Index

rrc real rate of change

S&P Standard & Poors

s.r.e. balances

SDR Special Drawing Rights

SGP Stability and Growth Pact

TARGET Trans-European Automated

Real-Time Gross Settlement Ex-

press Transfer

ULC Unit Labour Costs

UNCTAD United Nations Conference on

Trade and Development

USD US dollar

VAT Value Added Tax

y-o-yrc year-on-year rate of change


Overview





Chapter 5. Prices



Supplementary Tables

OVERVIEW

In 2005 developments in the Portuguese economy were marked by subdued growth, employment

stagnation and an increase in the unemployment rate. Even though GDP growth increased throughout

the year, on average and compared with 2004, the economy decelerated significantly, highlighting the

absence of a sustained recovery after the 2003 recession. At the same time, the structural situation of

public accounts continued to deteriorate in spite of the consolidation measures that have been imple-

mented. Developments in 2005 increased the real divergence from the euro area and reveal the diffi-

culty experienced by the Portuguese economy in adjusting to the monetary union rules and to the

intensifying globalization process.

Participation in the monetary union implies a regime of lower and less volatile interest rates and the

ability to obtain external financing without incurring foreign exchange risk. This reduction in liquidity

constraints increased equilibrium private sector indebtedness, with a significant impact on the behav-

iour of domestic demand. In fact, during the second half of the 1990s, easier financing and expecta-

tions of higher permanent income translated into a fall in the savings rate, boosting domestic

consumption, in particular of durable goods, and investment. Against this background, both the effects

of monetary union on private expenditure and the required move towards achieving the medium-term

objective of a budgetary position close to balance, in the context of the Stability and Growth Pact,

would have advised against an expansionary fiscal policy. Nonetheless, the growth of primary current

expenditure was unsustainable and exacerbated domestic expenditure dynamics, intensifying wage

pressures and the appreciation of the real exchange rate. These developments translated into a

significant gap between the growth of expenditure and output, largely financed by increased banking

sector external indebtedness.

In a context where the intertemporal budgetary constraints of economic agents continue to be relevant,

the correction of this external imbalance is inevitable. However, in a monetary union the endogenous

and equilibrium adjustment of the economy will tend to be smoother and, as a consequence, more pro-

longed over time. In fact, financial integration enhances the risk-sharing and diversification between

euro area countries, strengthening the smoothing of domestic consumption in response to idiosyn-

cratic and temporary shocks on income and wealth. This mechanism contrasts with the high volatility

and the rapid adjustment that characterised the correction of significant external imbalances in the

Portuguese economy in the past.

In turn, the intensification of the globalization process is set to translate in the long run into an overall

improvement of economic welfare, but tends to introduce significant transition costs at the sectoral

level. On the one hand, integration in the world economy of the new European Union Member States

and, more recently, of the developing Asian economies has changed the pattern of comparative ad-

vantages and increased global competition. The new international environment brings about new in-

vestment and business opportunities, with positive effects on productivity and welfare, but it requires a

significant reallocation of resources in the economy with costs during a transition period. On the other

hand, increased global competition means that consumers have benefited from significant price re-

ductions in several types of goods and services, notwithstanding the sharp rise in oil prices over the

past few years, which is also connected to the intensification of the globalization process.

The Portuguese economy virtually stagnated in 2005 and its growth rate was one of the lowest among

the advanced economies and the new European Union Member States. Portugal continued thus to

move away from the average EU per capita income levels. The cumulative divergence since 2000

places this indicator at a level close to that recorded in the early 1990s.


Overview

3

The real divergence of the Portuguese economy occurs in a context of low trend productivity growth,

which declined from around 2.5 per cent in the first half of the 1990s to 0.9 per cent on average in

2000-2005 (though it is important to note that the more recent developments have been affected by the

pro-cyclical nature of productivity). The latter figure is 0.4 p.p. lower than that of the euro area for the

same period. Low aggregate productivity growth in the past few years is associated, on the one hand,

with the external and internal shocks that have affected the Portuguese economy and, on the other

hand, with structural weaknesses , which affect the propagation mechanism of those shocks. The most

important factors shaping the ability of the Portuguese economy to adjust to shocks appear to be, on

the one hand, the persistence of distortions in the functioning of product and labour markets and, on

the other hand, structural weaknesses in the economy’s factor endowments, namely the low levels of

human capital and of the capital-labour ratio.

Turning to developments in productivity by sector in the past few years, and despite a high level of het-

erogeneity at a more disaggregated level, there is a clear contrast between the services sector – char-

acterised by an overall increase in employment and less favourable developments in productivity –

and manufacturing – characterised by a decline in employment and a rise in productivity. In 2005 activ-

ity in manufacturing declined, a situation which was more marked in the first half of the year. The fall

was largely due to developments in the so-called traditional industries, such as textiles, clothing and

footwear. These industries also saw employment go down significantly. In this context, there were pro-

ductivity gains that may be reflecting inter alia the closure of less competitive firms and the dismissal of

workers with lower productivity levels. These developments cannot be decoupled from the restructur-

ing of the economy in response to changes in the pattern of international trade. By contrast, the pace of

growth in the services sector continued to be higher than that of aggregate output, so that the relative

weight of this sector in the Portuguese productive structure continued to increase. Likewise, employ-

ment creation in services was significant and continued to be chiefly concentrated in the general gov-

ernment, health and education sectors. Thus, despite the above-average growth of activity, labour

productivity remained broadly unchanged in the services sector as a whole.

Banco de Portugal estimates point to a change in GDP of only 0.3 per cent in 2005, i.e. 0.8 p.p. lower

than the 2004 growth. On the expenditure side, the slowdown in Portuguese economy in 2005 mainly

reflected the contraction of investment and a considerable slowdown in exports. The growth of private

and public consumption remained clearly higher than that of GDP. This contrasts with previous busi-

ness cycles, in particular due to the lack of dynamism in both investment and exports, which typically

record the highest growth in recoveries, most notably in small open economies. These developments

also contrast with those in the euro area, where exports and investment performed more favourably in

2005.

The gross fixed capital formation fell again in 2005. The cumulative decrease in GFCF since 2001 to-

tals more than 15 per cent and the economy’s investment rate stands at a slightly lower level than in the

mid-1990s. Investment has been affected by poor demand growth prospects, the low level of human

capital (given the complementary nature of investment in physical and human capital), the uncertainty

about how the fiscal imbalance will be corrected (given the importance of stability in the tax system)

and the uncertainty surrounding implementation of the structural reforms required to increase produc-

tivity. It should be noted that the decline in investment took place in an environment characterised by

the persistence of monetary conditions globally supportive to growth, with particular emphasis on the

maintenance of real and nominal interest rates at low levels. This was true despite the decision taken

by the Governing Council of the European Central Bank, in December 2005, to raise the minimum bid

rate on the main refinancing operations by 25 basis points. In March and June 2006 this rate was again

raised by 25 basis points on each occasion, standing at 2.75 per cent in June.


Overview

4

In 2005 exports of both goods and services decelerated sharply compared with the previous year. In

spite of some slowdown, external demand remained strong, in tandem with world economic growth.

World trade in goods and services also remained buoyant – the change topping 7 per cent – and con-

tinued to benefit from the increasing integration of emerging and developing economies in the world

economy.

The continued weak performance of exports reflects the deteriorating competitiveness of the Portu-

guese economy in the recent past. This is associated with the successive rises in relative labour costs

throughout the last decade, as well as with increased competition stemming from EU enlargement and

the intensified globalization process, given the composition of Portuguese exports. Indeed, export de-

velopments have been affected by the pattern of specialisation, characterised by a still high weight of

low-skill and low-tech goods, such as textiles, clothing and footwear. These sectors face fiercer com-

petition from the new players in world trade, who are low-cost producers. According to available data,

in 2005 and for the fourth consecutive year, exports of this type of goods dropped sharply. These de-

velopments are consistent with the contraction of production and employment in these sectors of man-

ufacturing. It should also be noted that medium-tech exports, such as automobile and electrical

machinery, have also performed poorly over the past few years. These sectors have become increas-

ingly important in the Portuguese export structure, following major foreign direct investment projects in

the mid-1990s.

In annual average terms, private consumption remained relatively sustained, growing by 1.8 per cent.

This growth was, however, lower than the 2.3 per cent figure for 2004. This behaviour is partly ex-

plained by developments in household disposable income in 2005. This slowed down in real terms,

chiefly on the back of a smaller rise in the number of employees. However, the growth of private con-

sumption remained above that of disposable income, and the savings rate continued its downward

trend. With interest rates staying at low levels – in some cases associated with a squeeze in banks’

profit margins – and with the lengthening of loan maturities and the introduction of new products in the

credit market, the growth of the debt burden was held in check. This continued to sustain the expan-

sion of loans to households and to help smooth household consumption expenditure in relation to dis-

posable income. In this context, household indebtedness continued to increase, reaching 117 per cent

of disposable income, one of the highest levels among euro area countries.

Domestic demand slowed clearly in the course of the year, in line with the deteriorating consumer con-

fidence. Among the factors that contributed to the loss of domestic demand buoyancy in the second

half of 2005 were unfavourable labour market developments, tax hikes in the middle of the year –

which also heightened the perception of the degree of fiscal imbalance – and, to a smaller extent, ex-

pectations of a rise in interest rates after September, against a backdrop of high household

indebtedness.

In 2005, and for the fourth consecutive year, inflation, as measured by the annual average change in

the HICP, dropped, reaching 2.1 per cent (2.5 per cent in 2004). This behaviour translated into an infla-

tion differential vis-à-vis the euro area close to zero. This is consistent with the progressive narrowing

of this differential since 2002 and mainly reflects the reduction in the growth differential of services

prices. Cyclical developments in the Portuguese economy and the behaviour of import prices exclud-

ing fuel exerted a moderating effect on prices. The reduction in average inflation was also due to the

unwinding of the effects from the European Football Championship held in June 2004, which were

more strongly felt on services prices. It should be noted, however, that inflation followed an upward

trend in the second half of the year, reflecting, in particular, the rise in international oil prices and the in-

crease of the standard VAT rate from 19 to 21 per cent.


Overview

5

The roles played by the labour market, the fiscal policy and the financial system are of particular rele-

vance in the context of the ongoing adjustment process of the Portuguese economy to the new global

economic framework and to the operating rules of a monetary union. In fact, the efficient functioning of

the labour (and product) market is crucial to ensure the signalling role of input prices, as well as labour

mobility. In addition, sound public finances are not only part of a set of macroeconomic stability condi-

tions required for sustained growth, but are also fundamental to allow the full operation of automatic

stabilisers. Finally, the soundness of the financial system broadens the possibilities of choice for eco-

nomic agents, through an increase in the ability of households to smooth consumption and an easier

access to bank financing for firms.

Recent developments in the Portuguese labour market show that there is an ongoing sectoral restruc-

turing process. This process is needed urgently, but entails adjustment costs, which certain rigidities

tend to exacerbate. The unemployment rate stood at 7.6 per cent in 2005, a rise of 0.9 p.p. over 2004.

These developments seem to reflect an increase in the duration of unemployment rather than a higher

flow of new unemployed. Long-term unemployment, which is measured by the number of individuals

seeking work for a period of more than 12 months, increased by 3.7 p.p, reaching nearly 50 per cent,

i.e. a higher level than in the comparable phase of the previous business cycle. Long-term unemploy-

ment tends to increase in periods of weak economic growth and sectoral restructuring, as a result of

the depreciation and inadequacy of professional skills of the unemployed to new job offers. This is par-

ticularly relevant in a population with low average education levels. However, unfavourable develop-

ments in long-term unemployment seem also to be associated with the changes introduced in 1999

and 2003 in the unemployment benefit policy. The latter made eligibility easier, lengthened the unem-

ployment benefit periods and created a monetary incentive for employees to shift into long-term

unemployment in the period immediately before retirement.

The rise in both the unemployment rate and long-term unemployment does not seem to be translating

into a significant adjustment of wages. Nominal compensation per employee for the total economy is

estimated to have increased by approximately 3 per cent in 2005, i.e. at a rate of growth close to that

recorded in the previous year. In this context, unit labour costs accelerated significantly, and the corre-

sponding growth differential vis-à-vis the euro area widened.

The Portuguese fiscal situation continued to deteriorate in 2005, despite the consolidation measures

taken as from the middle of the year. The general government deficit reached 6 per cent of GDP and

the debt ratio increased sharply, standing at 64 per cent. The underlying fiscal position, measured by

the overall balance adjusted for the cycle and for the effects of temporary measures, worsened by 0.6

p.p. of GDP. Following the update of the Stability Programme submitted by the Portuguese authorities

in June, which considered more realistic fiscal projections that pointed to a general government deficit

far above the reference value of 3 per cent of GDP for 2005, the Council of the European Union

declared that Portugal was in an excessive deficit situation.

The structural imbalance in the public accounts is caused by the trend growth of the primary current ex-

penditure in relation to GDP. In fact, primary current expenditure continued to increase at very high

rates – around 7 per cent – chiefly reflecting the growth of social transfers, in particular expenditure on

pensions. Staff costs also increased strongly, due to both the end of the partial freeze on public sector

wages and the rise in the number of civil servants. The level of primary current expenditure as a per-

centage of GDP currently stands close to the euro area average, despite the far lower per capita in-

come of the Portuguese economy. The consolidation measures adopted since 2002 have not been

sufficient to reverse the trend of rapid expenditure growth. As a result, in spite of the rise in the tax bur-

den, the structural fiscal balance in 2005 was close to the level in 2001.


Overview

6

In the context of the financial integration of the Portuguese economy in the euro area, translated into

the absence of restrictions on financing and into the maintenance of very favourable financing condi-

tions, the deterioration of the fiscal situation led to a further rise in the external financing requirements

of the economy. Indeed, the combined current and capital account deficit widened by around 2.5 p.p.,

standing at 8.1 per cent of GDP, i.e. the highest value among euro area countries. External financing

came chiefly through the general government, whose borrowing from non-residents increased

strongly. In turn, the borrowing requirements of the non-financial private sector continued to be met

largely through the resident banking system, which resorted to external borrowing (chiefly through the

issuance of medium and long-term debt). The external indebtedness of the Portuguese economy,

measured by the international investment position, therefore continued to increase, standing at 64 per

cent of GDP. The weight of interest-bearing liabilities also continued to increase, to the detriment of

financing through the sale of equity or direct investment.

Over the past few years, the banking system in Portugal has played an important role in the adjustment

dynamics of the economy, in a context of financial integration in the euro area. In 2005 the behaviour of

the banking system confirmed its resilience to the low trend growth of the economy. In fact, in 2005

profitability, solvency and credit quality indicators recorded increases. Liquidity indicators deteriorated

somewhat, although banks continued to lengthen the average maturity of their market liabilities, amid

favourable external financing conditions. Moreover, the banking system was characterised by the ex-

pansion of activity, reflecting in particular the strong growth of credit (notably housing loans).

Looking forward, the efficient reallocation of resources in the Portuguese economy is not compatible

with the continued rise in public sector employment and requires effective containment of the growth in

expenditure and taxation. With regard to the labour market, there needs to be greater wage flexibility in

order to speed up the sectoral restructuring process and to reduce its unemployment costs. In this con-

text, the current wage rigidity in the Portuguese labour market makes adjustment more difficult and

jeopardizes productivity growth. As regards the functioning of the product market, the adoption of poli-

cies fostering competition is crucial to stimulate the growth of the more productive firms and sectors.

Market flexibility adds to increased productivity through the efficient use of available productive fac-

tors, their correct sectoral allocation and the incentive to adopt new productive processes. In the con-

text of the adjustment to the shocks that have affected the Portuguese economy, an acceleration in

productivity is key to the recovery of the international competitiveness of the Portuguese economy.


Overview

7


Overview

9

Table 1

PORTUGAL – MAIN ECONOMIC INDICATORS 2003-2005

Units 2003 2004 2005

I. Prices, wages and unit labour costs

Inflation (CPI) arc; % 3.3 2.4 2.3

Goods arc; % 2.7 1.6 1.9

Services arc; % 4.5 3.8 3.0

Inflation (HICP) arc; % 3.3 2.5 2.1

GDP deflator arc; % 3.0 2.6 2.4

Private consumption deflator arc; % 2.9 2.4 2.3

Goods and services export deflator arc; % -1.8 0.7 1.8

Goods and services import deflator arc; % -2.1 1.6 3.6

Nominal compensation per employee, total economy(a)(c)

arc; % 2.2 (1.8) 2.3 (2.8) 3.0

Nominal compensation per employee, private sector(a)(d)

arc; % 2.6 (2.0) 2.5 (3.2) 3.2

Unit labour costs, total economy(a)(c)

arc; % 3.0 (2.6) 1.3 (1.8) 2.7

Unit labour costs, private sector(a)(d)

arc; % 3.5 (2.9) 1.4 (2.0) 2.7

II. Expenditure, income and savings

Gross domestic product (GDP) rrc; % -1.2 1.1 0.3

Total domestic demand rrc; % -2.2 1.9 0.6

Private consumption rrc; % 0.0 2.3 1.8

Public consumption rrc; % 0.7 1.6 1.9

Gross fixed capital formation rrc; % -10.0 0.0 -2.7

Exports of goods and services rrc; % 3.7 5.3 0.9

Imports of goods and services rrc; % -0.5 7.0 1.7

Household disposable income (DI)(a)

rrc; % -0.5 (-0.3) 1.8 (1.6) 1.0

Household disposable income excluding external transfers(a)

rrc; % 0.0 (0.2) 1.9 (1.7) 1.3

Domestic savings rate % of GDP 16.9 15.6 13.1

Private sector(a)(b)(e)

% of GDP 18.3 (19.5) 17.8 15.9

Households % of DI 10.4 (10.6) 9.9 9.2

Households, excluding external transfers % of DI 8.1 (8.3) 7.7 7.3

Corporations % of GDP 10.9 (12.0) 10.7 9.3

General government(a)(b)

% of GDP -1.4 (-2.7) -2.2 -2.8

III. Employment and unemployment

Total employment(f)

arc; % -0.4 0.1 0.0

Employees arc; % -0.6 1.2 0.8

Unemployment rate annual average; % 6.3 6.7 7.6

IV. Balance of payments (transactions basis)

Current account + Capital account % of GDP -4.0 -5.7 -8.1

Current account % of GDP -5.9 -7.3 -9.3

Goods account % of GDP -9.1 -10.5 -11.4

Capital account % of GDP 1.9 1.6 1.2

V. Exchange rates(g)

Nominal effective exchange rate index arc; % 2.6 0.7 -0.2

Real effective exchange rate index

Adjusted for the relative unit labour costs(h)

arc; % 3.2 1.4 0.9

Adjusted for the relative consumer price index arc; % 3.7 1.0 -0.4

VI. Interest rates

3-month Euribor %, Dec. 2.1 2.2 2.5

10-year fixed rate Treasury bond yields %, Dec. 4.4 3.6 3.5

Interest rates on outstanding amounts of credit granted by MFIs(i)

Loans to households for house purchase %, Dec. 3.8 3.8 3.7

Loans and other credits to non-financial corporations %, Dec. 4.4 4.3 4.4

Deposits and deposit-like instruments up to 2 years %, Dec. 2.0 2.0 2.1

VII. Stock price index (PSI-Geral) y-o-yrc; 31-Dec. 17.4 18.0 17.2

VIII. Bank deposits and loans to the resident sector(j)

Deposits

Transferable deposits and other sight liabilities y-o-yrc; Dec. 2.0 0.8 13.2

Notice, saving and time deposits y-o-yrc; Dec. 0.3 5.0 10.4

Loans(k)

Non-monetary sector, excluding general government y-o-yrc; Dec. 6.2 6.5 7.4

Non-monetary financial institutions y-o-yrc; Dec. 4.1 13.4 2.6

Non-financial corporations y-o-yrc; Dec. 2.7 2.5 5.0

Households y-o-yrc; Dec. 9.6 9.2 9.8

IX. Public finance

General government overall balance(l)

% of GDP -2.9 -3.2 -6.0

excluding temporary measures -5.3 -5.3 -6.0

General government primary balance % of GDP -0.2 -0.5 -3.3

excluding temporary measures -2.5 -2.7 -3.3

Consolidated gross public debt Dec., % of GDP 56.9 58.6 64.0

Notes:(a) In 2003 the values are adjusted for the direct effects of the sale of tax credits.(b) In 2003 and 2004 the values are adjusted for the direct effects of the transfers of assets from state-owned en-

terprises to the general government.(c) Compensation per employee; including wage scale value, additional benefits and Social Security contributions from employers; excluding the State transfers to

Caixa Geral de Aposentações.(d) Private sector - total economy excluding general government. (e) Aggregate savings for the economy excluding general government.(f) Data collected from INE’s

national accounts for 2003 and from INE’s Labour Force Survey for 2004 and 2005. Data for employees are collected from the Labour Force Survey. (g) A positive change denotes an appreciation in

effective terms; a negative change denotes a depreciation.(h) Relative unit labour costs in the total economy. A positive change denotes an increase in the relative costs of Portuguese producers.(i)

Calculated as the average of the interest rates on outstanding amounts of credit granted and deposits taken by MFIs, denominated in euro, to/from euro area residents, broken down by sector and/or

purpose, in every maturity, weighted by the respective end-of-month amounts outstanding. (j) End-of-month balances.(k) Year-on-year rates of change of outstanding amounts, calculated making use

of end-of-month balances adjusted for securitisations and monthly transactions, which are calculated from amounts outstanding adjusted for reclassifications, asset deductuons, and exchange rate

and price revaluations.(l) According to the methodology of the Excessive Deficit Procedure. arc: Average rate of change.rrc: Real rate of change.y-o-yrc: Year-on-year rate of change.

1. INTERNATIONAL ENVIRONMENT

In 2005 the world economy expanded at around 5 per cent, decelerating only slightly from the previous

year (Table 1.1). World trade increased also markedly, above its average growth over the past decades

(Chart 1.1). In the course of the year, international commodity prices increased further, quite sharply in

the case of oil. World inflation rose, reflecting mainly the hike in the energy component of consumer

price indices, whereas underlying inflation1

was contained in most countries. The increase in oil prices

implied a significant change in the terms of trade, contributing to the deterioration of global imbal-

ances. The US current account deficit attained unprecedented levels, whereas surpluses from oil-ex-

porting countries and China increased further (Chart 1.2). Nonetheless, the depreciating trend of the

US dollar observed in recent years was reversed.

Oil prices increased again sharply in 2005, with the price of Brent crude oil reaching a historical peak of

USD 67.5 in early September. In the year as a whole, the average price of Brent crude oil increased by

around 45 per cent from 2004, both in US dollars and in euro. The rise in the oil price continued to re-

flect the buoyancy of the world economy and the associated increase in the demand for energy – par-

ticularly sharp in the case of developing and emerging market economies –, as well as the rigidity of

supply, signalling the low levels of investment in productive capacity by oil producers over the last de-

cades. Issues of a more temporary nature added to these factors, such as concerns about distur-

bances in supply related to geopolitical tensions in several important producing countries (Iraq, Iran,


International Environment | Chapter 1

11

Table 1.1

GROSS DOMESTIC PRODUCT AND INFLATION

Per cent

Weight in

world GDP

in 2005(a)

GDP

Rate of change

Consumer prices(b)

Rate of change

2003 2004 2005 2003 2004 2005

World economy4.1 5.3 4.8 3.6 3.7 3.8

Advanced economies 52.3 2.0 3.3 2.7 1.8 2.0 2.3

US 20.1 2.7 4.2 3.5 2.3 2.7 3.4

Japan 6.4 1.8 2.3 2.6 -0.3 0.0 -0.3

Euro area(c)

14.8 0.7 1.8 1.4 2.1 2.1 2.2

Germany(c)

4.1 -0.2 1.1 1.2 1.0 1.8 1.9

France(c)

3.0 1.1 2.0 1.2 2.2 2.3 1.9

Italy(c)

2.7 0.1 0.9 0.1 2.8 2.3 2.2

Spain(c)

1.8 3.0 3.1 3.4 3.1 3.1 3.4

United Kingdom 3.0 2.5 3.1 1.8 1.4 1.3 2.0

New industrialised Asian economies(d)

3.2 3.2 5.8 4.6 1.4 2.4 2.2

Developing and emerging market economies 47.7 6.7 7.6 7.2 5.8 5.7 5.4

Central and Eastern Europe 3.3 4.7 6.5 5.3 9.2 6.1 4.8

Commonwealth of Independent States 3.8 7.9 8.4 6.5 12.0 10.3 12.3

Russia 2.6 7.3 7.2 6.4 13.7 10.9 12.6

Developing Asian countries 27.1 8.4 8.8 8.6 2.5 4.2 3.6

China 15.4 10.0 10.1 9.9 1.2 3.9 1.8

India 5.9 7.2 8.1 8.3 3.8 3.8 4.2

Middle East 2.8 6.6 5.4 5.9 7.1 8.4 8.4

Latin America 7.4 2.2 5.6 4.3 10.5 6.5 6.3

Africa 3.3 4.6 5.5 5.2 10.8 8.1 8.5

Sources: Eurostat, IMF and Thomson Financial Datastream.

Notes: (a) Based on GDP measured in purchasing power parities. (b) Harmonised Index of Consumer Prices for the euro area, Germany, France, Italy, Spain and United Kingdom. (c)

Seasonally and working-day adjusted data. (d) South Korea, Hong Kong, Taiwan and Singapore.

(1) Underlying inflation excludes energy and unprocessed food.

Nigeria). Russian production decelerated markedly, while North-American production was severely af-

fected by Mexican Gulf hurricanes. All these factors have exerted upward pressures on oil prices in the

course of the year. Prices of other commodities also increased in 2005 – by approximately 9.5 per cent

on average – in particular iron and steel prices (Chart 1.3).

Thus far, the impact of the sharp increase in international commodity prices on economic activity and

world inflation seems to have been relatively limited, reflecting several factors. On the one hand, the

recent increase in oil prices was chiefly determined by an expansion of global demand, against the

background of restrictions on the supply side. On the other hand, oil consumption per unit of output has

declined since the mid-70s, particularly in advanced economies, implying less vulnerability to a price


Chapter 1 | International Environment

12

-2

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005

Per

cent

World

GDP

World trade of

goods and services

1980-2005 average world trade

1980-2005 average world GDP

-1000

-800

-600

-400

-200

0

200

400

Euro

are

a

Japan

Chin

a

Asia

excl.

Japan

and

Chin

a

Mid

dle

East

and

Com

monw

ealth

of

Independent

Sta

tes

Rest

of

the

world

Sta

tisticaldis

cre

pancy

US

bill

ion

2003 2004 2005

US

10

20

30

40

50

60

70

Jan-02 Jan-03 Jan-04 Jan-05

US

Dp

er

ba

rre

l

80

90

100

110

120

130

140

150

160

20

00

=1

00

Oil (Brent)

Non-energy commodity

prices (right-hand scale)(a)

Chart 1.1

WORLD GDP AND TRADE

Real rate of change

Source: IMF.

Chart 1.2

CURRENT ACCOUNT

Source: IMF.

Chart 1.3

INTERNATIONAL COMMODITY PRICES

In USD

Source: HWWA and Thomson Financial Datastream.

Note: (a) Weights based on imports of the twelve euro area countries (from third coun-

tries) in 1999-2001.

increase. In addition, the credibility of monetary policy in inflation stabilisation has contributed to limit

the emergence of significant second-round effects on wages. Pressures resulting from increased

global competition – reflecting growing participation of low-cost economies in world trade – seem to

have also contributed to the maintenance of low inflation levels in the advanced economies, particu-

larly through their impact on the prices of tradable goods and services and on decisions regarding

wages in labour markets.

In 2005, world trade of goods and services grew by 7.3 per cent, 3.1 p.p. less than in 2004. The moder-

ation of growth extended to trade of both goods and services. As regards the latter, revenue associ-

ated with travel and tourism services increased further in 2005, according to data from the World Trade

Organisation (above 10 per cent, in nominal terms and in US dollars, compared with 18 per cent in

2004). International tourism real indicators suggest that this buoyancy was broadly based across mar-

kets of destination (Table 1.2).

Real external demand directed to Portuguese exporters grew by 5.8 per cent in 2005, 2.7 p.p. less than

in the previous year (Table 1.3). This lower growth reflects a deceleration in imports of goods in Portu-

gal’s major trading partners. The nominal indicator of external demand presented similar develop-

ments. However, as mentioned in more detail in Chapter 3. Output, expenditure and external accounts,

growth of Portuguese exports was well below that recorded by external demand, implying new losses

in the share of national producers in external markets, in both real and nominal terms.

The strong growth of international trade flows continued to reflect not only the expansion of global ac-

tivity, but also the increased integration of developing and emerging market economies in the world

economy (see “Box 1.1 Intensification of the globalisation process"). Similarly to developments over

the last decade, the increase in exports from these economies in 2005 has again largely exceeded the

rise in total world exports (Chart 1.4). Note in particular that export growth in Asian developing econo-

mies and in central and eastern European economies in 1995-2005 exceeded the world total by a fac-

tor of 2 and 1.5, respectively. As a result, the weight of advanced economies on world exports has been

declining. This suggests that the loss of export market share in Portugal over this period is partly re-

lated to this phenomenon. However, given that the growth of Portuguese exports was lower than that

observed, on average, in advanced economies and in the euro area since 1995, losses in external

market share were more marked in the Portuguese case. This less favourable behaviour of Portu-

guese exports is associated with the sectoral specialisation of the exporting sector and developments

in its cost-competitiveness (see “Chapter 3 Output, Expenditure and External Accounts”).



13

Table 1.2

DEVELOPMENTS IN INTERNATIONAL TOURISM

International tourist arrivals

(millions)

Rate of change

(per cent)

2004 2005 2003 2004 2005

World 766 808 -1.7 9.9 5.5

Africa 33 37 4.1 8.5 10.2

Americas 126 133 -3.1 11.2 5.8

Asia and the Pacific 145 156 -9.4 27.3 7.4

Middle East 36 38 2.7 19.7 7.0

Europe 426 444 0.3 4.2 4.3

Northern Europe 48 52 1.6 8.8 7.0

Western Europe 139 141 -1.4 1.9 1.7

Central and Eastern Europe 89 92 2.8 11.0 3.6

Southern and Mediterranean 150 159 0.1 1.2 6.2

Source: World Tourism Organisation.

Foreign direct investment flows increased also significantly in 2005 (29 per cent, after 9 per cent

growth in 2004). This trend was consistent with buoyant world activity and with the improving financial

situation of corporations. Contrary to developments in 2004, the increase was broadly based across

regions (Chart 1.5). As in previous years, most foreign direct investment flows occurred among ad-

vanced economies. From 2000 to 2005, these economies were the source and destination of approxi-

mately 90 per cent e more than 70 per cent of such flows respectively. Flows to developing and

emerging market economies have been increasing in absolute terms, but maintain a relatively small

weight in world total.

The expansion of world activity in 2005 continued to be led by the US and by Asian developing coun-

tries, in particular China (Chart 1.6). Middle East countries and the Commonwealth of Independent

States, which concentrate a large share of oil-exporting economies, also posted strong growth, reflect-



14

Table 1.3

EXTERNAL DEMAND FOR PORTUGUESE GOODS

Rate of change in volume

Per cent

Weights in

2004

2003 2004 2005

External demand(a)

100.0 4.5 8.5 5.8

Intra euro area external demand 76.4 4.5 8.4 6.1

of which:

Spain 27.2 6.4 10.1 7.1

France 15.1 0.8 7.5 7.1

Germany 16.9 6.6 8.2 6.1

Extra euro area external demand 23.6 4.7 8.7 4.7

of which:

United Kingdom 11.8 5.5 7.8 2.2

US 6.5 4.9 11.0 6.9

Sources: INE, European Commission and UK Office for National Statistics.

Note: (a) Calculated as a weighted average of real growth of imports of goods of the 17 major trading partners. Each individual country was weighted according to its share in Portuguese

exports of goods in the previous year. The 17 countries selected are the destination of around 90 per cent of total exports of goods.

100

120

140

160

180

200

220

240

260

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

19

95

=1

00 Advanced

economies

Developing and

emerging market

economies

World

total

Euro area

Portugal

-100 100 300 500 700 900

World

EU25

of which:

United Kingdom

10 New Member States

Other EU25 countries

US

Asia and Pacific

Latin America and Caribbean

Commonwealth of Independent

States and Southern Europe

Other countries

USD million

2003 2004 2005

Chart 1.4

EXPORTS OF GOODS AND SERVICES

Volume

Source: IMF and Banco de Portugal.

Chart 1.5

FOREIGN DIRECT INVESTMENT

Net inflows

Source: UNCTAD.

ing the significant terms of trade gains induced by the increase in the oil price. In the euro area, growth

continued to be weak, despite some recovery from the first to the second half of the year.

In the United States, real GDP increased by 3.5 per cent in 2005 (4.2 per cent in 2004). The expansion

of economic activity continued to be based on buoyant private consumption and investment. The

strong growth of private consumption reflected again wealth effects – chiefly associated with the hike in

housing prices – and the continued improvement in employment. The behaviour of consumption, in

parallel with the slowdown in real disposable income – largely resulting from the increase in energy

prices – was reflected in a further decline in the household savings rate to historical lows. The public

sector borrowing requirements remained high in 2005, in spite of a decline from the previous year. In

particular, the cyclically adjusted budget deficit amounted to 3.9 per cent of GDP, 0.5 p.p. less than in

2004. This improvement will probably be temporary, given that it reflects the strong increase in corpo-

rate tax revenue, which is only partly explained by the increase in profits, and that public expenditure is

projected to increase significantly in 2006.

The rise in household financing needs, in parallel with the persistently high public sector deficit, implied

a further deterioration of the current account, which reached 6.4 per cent of GDP in 2005 (5.7 per cent

in 2004). Considering end-of-period values, the effective exchange rate of the US dollar appreciated.

Notwithstanding a depreciation of the US currency vis-à-vis a number of currencies of emerging mar-

ket economies,2

that trend was more than offset by its appreciation vis-à-vis the euro, the yen and the

pound sterling. Similarly to developments in previous years, the financing of the external deficit con-

tinued to rely to a large extent on the investment of international reserves built up by a number of cen-

tral banks in Asia and in oil-exporting countries in US Treasury securities, in the context of these

countries’ exchange-rate policies. US balance of payments statistics show that financial flows with the

non-resident official sector continued to give rise to inflows of funds in 2005, albeit to a lesser extent

than in 2004 (1.8 and 3.4 per cent of GDP, respectively). In 2005 the largest share of the external deficit

financing consisted of net private financial inflows. However, these private financial flows likely include

a significant share of investments of OPEC countries in US securities, which are intermediated



15

0

1

2

3

4

5

6

2002 2003 2004 2005

Inperc

enta

ge

poin

ts

US (20.3%)

Euro area (15.3%)

China (14.7%)

Other developing Asian economies (11.5%)

Rest of the world (38.2%)

Chart 1.6

CONTRIBUTIONS TO WORLD GDP GROWTH

Source: IMF.

Nota: The weight of these economies in total world GDP in 2004 , evaluated in terms of

purchasing power parities, is shown in brackets.

(2) Considering end-of-period values, the dollar depreciated by 2.5 per cent vis-à-vis the renmimbi, 4.7 per cent vis-à-vis the Mexican peso, 2.4 per cent

vis-à-vis the South Korean won and 12.1 per cent vis-à-vis the Brazilian real. It also depreciated vis-à-vis the Canadian dollar (3.1 per cent).2

through international financial centres (United Kingdom and Caribbean countries). Against this back-

ground, available data may underestimate the importance of the non-resident official sector in the

financing of the US current account deficit.

Annual average inflation in the US increased from 2.7 per cent in 2004 to 3.4 per cent in 2005, largely

as a result of the behaviour of energy prices. The measure of inflation that excludes energy and food

showed a more moderate rise from 1.8 to 2.2 per cent. In response to the risk of emerging inflationary

pressures due to high energy prices and to possible increases in resource utilisation, the Federal Re-

serve continued to gradually remove the monetary stimulus, raising the target for the federal funds rate

by a total of 2 p.p. in 2005 (a 25 b.p. increase in each meeting). The federal funds rate stood at 4.25 per

cent at the end of the year.

Economic recovery continued in Japan. Real GDP increased by 2.7 per cent in 2005, 0.4 p.p. above

the rise in the previous year. Export growth continued to be relatively high, sustained by strong demand

in the United States and in China and by the effective depreciation of the yen. In addition, the contribu-

tion of domestic demand to growth increased significantly, reflecting the improvement in the labour

market situation and in corporate profits. In the year as a whole, consumer prices declined slightly, al-

though the index excluding fresh food has ceased to decline in year-on-year terms in the fourth quarter

of the year. Against the background of persistent moderate deflationary pressures, the Bank of Japan

maintained its liquidity injection policy in the course of the year. In October 2005, however, the Japa-

nese monetary authorities announced that this near-zero short-term interest rate policy might be

changed in the course of 2006, should the favourable projections for price developments materialise.3

The Chinese economy continued to grow at a rather high pace in 2005, reflecting robust investment

and the significant contribution of net external demand to GDP growth.4

Export growth continued to be

very high (above 20 per cent in real terms). Behind this was, inter alia, the removal of all remaining

trade quotas for textiles and clothing among WTO countries in January 2005. However, both the US

and the EU made use of the safeguard clause included in the protocol of the accession of China to the

WTO in 2001, allowing member countries to take temporary measures in order to protect national pro-

ducers in the case of a sudden rise in imports from China after the removal of the quotas. In spite of

strong economic growth, inflationary pressures in China remained contained, given the slowdown in

food prices and the downward pressures on prices in some sectors with excess capacity. In July, the

Chinese authorities revalued the renminbi vis-à-vis the US dollar by 2.1 per cent and announced a

change in their exchange-rate regime. The peg to the US dollar was discontinued and a managed

floating regime vis-à-vis a basket of currencies was introduced. From the revaluation up to the end of

the year, the renmimbi appreciated by 0.5 per cent vis-à-vis the US dollar. In the context of the policy of

virtual stabilisation of the exchange rate vis-à-vis the US dollar, the increase in the current account sur-

plus, combined with significant external capital inflows, translated into a faster accumulation of net

official reserves.

In the euro area, the main market of destination of Portuguese exports, real GDP growth stood at 1.4

per cent in 2005, 0.4 p.p. below the figure recorded in the previous year. This slowdown reflected a

lower contribution of the change in inventories and of net exports to GDP growth. In spite of lower

growth of both exports and imports in the year as a whole, these flows accelerated from the first to the

second half of the year (Chart 1.7). Higher growth of exports in the second half of the year seems to

have reflected the acceleration of world demand and the effects of the depreciation of the euro effec-



16

(3) On 9 March 2006, the Bank of Japan decided to change the monetary policy operating target – which was set since March 2001 for the outstanding

balances of the current accounts held by monetary financial institutions with the Bank – and adopted the objective of maintaining the overnight call rate at

zero per cent.

(4) Revisions to the Chinese National Accounts disclosed in December 2005 suggest that economic growth in recent years was even higher than previously

reported.

tive exchange rate in the first half of the year. Domestic demand excluding inventories accelerated in

the year as a whole, chiefly reflecting higher GFCF growth. In 2005, this expenditure component grew

by 2.5 per cent, compared with 1.9 per cent in 2004. Investment, whose growth increased from the first

to the second half of the year, continued to benefit from favourable financing conditions and from the

improving financial situation of corporations. In contrast, private consumption growth was again weak



17

GDP

-1

0

1

2

3

4

2003 I 2004 I 2005 I

Pe

rce

nt

EA DE FR IT SP

Domestic demand

-1

0

1

2

3

4

5

6

2003 I 2004 I 2005 I

Pe

rce

nt

EA DE FR IT SP

Private consumption

-1

0

1

2

3

4

5

6

2003 I 2004 I 2005 I

Pe

rce

nt

EA DE FR IT SP

GFCF

-8

-4

0

4

8

2003 I 2004 I 2005 I

Pe

rce

nt

EA DE FR IT SP

Exports of goods and services

-6

-4

-2

0

2

4

6

8

10

12

14

2003 I 2004 I 2005 I

Pe

rce

nt

EA DE FR IT ES

Imports of goods and services

-2

0

2

4

6

8

10

2003 I 2004 I 2005 I

Pe

rce

nt

EA DE FR IT ES

Chart 1.7

MAJOR EURO AREA ECONOMIES – GDP AND EXPENDITURE COMPONENTS

Year-on-year rate of change

Sources: Eurostat and Thomson Financial Datastream.

(1.4 per cent, as in 2004), against a background of continued consumer confidence at relatively low

levels, absence of significant labour market improvements and sharp rise in energy prices.

Inflation in the euro area stood at 2.2 per cent in 2005, after 2.1 per cent in the two previous years. The

increase in inflation reflected an acceleration in energy prices. The rate of change of the HICP exclud-

ing unprocessed food and energy declined from 2.1 per cent in 2004 to 1.5 per cent in 2005. This de-

celeration of prices excluding the more volatile components reflected the lower contribution to price

increases from fiscal measures (i.e., smaller increases in indirect taxes and administered prices), the

modest pace of growth of activity and continued wage moderation.

Developments in economic activity in the euro area countries remained differentiated in 2005. In par-

ticular, growth rates were above 3 per cent in Spain, Greece and Ireland, and close to or below 1 per

cent in Germany, the Netherlands, Italy and Portugal. Growth differentials across the different econo-

mies in the euro area have been relatively persistent, likely reflecting factors other than cyclical differ-

ences. As regards inflation, in 2005 most euro area countries showed an increase in the annual

average rate of change of the HICP and a decrease in the change of the HICP excluding the more vola-

tile components. Inflation dispersion among the different euro area countries remained at levels close

to those recorded in the previous year and below those observed in the years following the creation of

monetary union. As in the case of growth differentials, however, inflation differentials across euro area

countries have been relatively persistent, implying significant changes in bilateral real exchange rates

(see “Box 1.2 Growth and inflation differentials in the euro area”).

In December 2005 the Governing Council of the ECB decided to increase the interest rate on the main

refinancing operations to 2.25 per cent, as a result of intensified risks of emerging inflationary pres-

sures, namely those associated with possible second-round effects due to the oil price increase (see

“Section 1 of Chapter 2 The monetary policy of the ECB and monetary and financial conditions of the

Portuguese economy”).

The general government deficit in the euro area as a whole declined from 2.8 per cent of GDP in 2004

to 2.4 per cent in 2005. This drop was chiefly explained by higher revenue – in particular the strong

growth in direct taxes paid by corporations – and, to a lesser extent, by the moderation in expenditure.

The cyclically adjusted primary balance improved by 0.6 p.p. of GDP, suggesting a slightly fiscal tight-

ening. The euro area average, however, reflects rather differentiated fiscal positions among the Mem-

ber States. The 3 per cent of GDP reference value for the general government deficit was again

exceeded in four countries in 2005 (Germany, Italy, Greece and Portugal). An excessive deficit situa-

tion persisted also in France, in spite of the narrowing of the fiscal deficit to a level slightly below 3 per

cent in 2005 (see Supplementary Table A.1.5).

In most of the other EU countries, economic activity continued to expand at rates above those ob-

served in the euro area. However, in the United Kingdom (the economy among the latter countries with

more weight on Portuguese exports) real GDP growth declined from 3.1 per cent in 2004 to 1.8 per

cent in 2005, reflecting a deceleration in private consumption and investment. This deceleration was

partly associated with the increase in official interest rates in the course of 2004, which totalled 1 p.p. In

2005, housing prices in the United Kingdom increased further – by approximately 5 per cent – but sig-

nificantly less than in 2004 (around 18 per cent). In August 2005 the Bank of England lowered the offi-

cial interest rate by 25 p.b., considering that less pressure of demand on capacity utilisation would lead

to some moderation in inflation. Annual average inflation, measured by the HICP, stood at 2 per cent in

2005 (1.3 per cent in 2004). The general government deficit remained above 3 per cent of GDP in

2005.

In the 10 new EU Member States, GDP growth remained robust on average, particularly in the Baltic

countries. As regards the larger countries, activity in Poland decelerated – although GDP growth has



18

remained at 2.6 per cent – whereas GDP in Hungary and in the Check Republic grew at a pace close to

4 and 6 per cent respectively.

Conditions in main international financial markets remained broadly favourable in 2005 (Table 1.4).

The year was marked by further increases in major stock market indices and by the maintenance of

long-term government bold yields at historically low levels. In parallel, implied volatilities saw a broadly

based decline in both equity and bond markets. Yield spreads between private debt bonds and govern-

ment debt bonds also remained narrow, but with an increase from the previous year in the case of

higher-risk bonds. Emerging market economies also saw a valuation of stock markets and a further

drop in the interest rate spreads between sovereign issuer bonds and US treasury securities to levels

close to historical minimums.

Most major stock market indices increased in 2005 for the third consecutive year. This reflected fa-

vourable prospects for profits, against the background of continued strong pace of world economic

growth and of corporate consolidation/restructuring efforts in recent years. Among advanced econo-

mies, the strong gains of the Japanese stock exchange should be emphasised. The US market re-

vealed a more modest behaviour – in particular when compared with the euro area – which seems to

be somewhat inconsistent with the productivity and economic growth differentials observed (and ex-

pected), as well as with the financing capacity accumulated by US corporations. This divergence may

be related to different factors. On the one hand, the growth of profits was more significant in euro area

corporations than in their US counterparts. On the other hand, the increase in real government bond



19

Table 1.4

INTERNATIONAL FINANCIAL MARKETS

Averages End of period

2003 2004 2005 2003 2004 2005

Stock market indices (change in percentage)

S&P 500 -3 17 7 26 9 3

Nasdaq 7 21 6 50 9 1

Nikkei 225 -8 20 11 24 8 40

FTSE 100 -12 12 14 14 8 17

Dow Jones Euro Stoxx -18 18 17 18 10 23

10-year government bond yields (per cent)

US 4.0 4.3 4.3 4.2 4.2 4.4

Japan 1.0 1.5 1.4 1.4 1.4 1.5

United Kingdom 4.5 4.9 4.4 4.8 4.5 4.1

Euro area 4.2 4.1 3.4 4.3 3.7 3.4

Differential between the yields on corporate bonds and 7 to 10-year

government bonds (in basis points)

US

AA 20.3 13.1 24.1 14.1 19.7 40.0

BBB 128.5 72.8 76.1 79.7 58.2 98.5

Euro area

AA 39.6 32.6 27.9 31.3 32.7 29.2

BBB 132.8 83.9 98.2 92.0 71.5 122.5

Emerging market spreads (b.p.)

EMBI+ 561.8 437.2 316.7 418.0 356.0 245.0

Nominal effective exchange rates (change in percentage)(a)

US dollar -6.0 -4.6 -2.5 -8.8 -4.5 3.5

Japanese yen -0.1 1.9 -3.1 2.2 -0.8 -7.8

Pound sterling -4.8 4.1 -1.0 -3.4 1.4 -0.3

Euro 12.0 4.0 -0.9 12.2 2.1 -7.1

Memo:

EUR/USD exchange rate(b)

19.6 10.0 0.0 20.4 7.8 -13.4

Sources: Bank for International Settlements, Bloomberg, ECB, Federal Reserve and JP Morgan.

Notes:(a) A positive change corresponds to an appreciation of the currency. (b) A positive change corresponds to an appreciation of the euro.

yields, which affects the discount rate used by investors for the valuation of their assets, may have con-

tributed to the deceleration in stock prices in the United States. In addition, investors may have consid-

ered that US corporate stocks are relatively overvalued, taking into account the persistence of the

price-to-earnings ratio at values above its historical average.

The overall trend of euro area and US indices in 2005 reflected different sectoral behaviours. In the

euro area, the positive trend of stock prices was broadly based across the sectors which are part of the

Dow Jones Euro Stoxx index (the sole exception was the telecommunication sector), with special ref-

erence to the significant valuation in the banking sector (26.5 per cent in 2005). In contrast, in the

United States, valuation was more significant in the energy and utilities corporations – accounting for

only approximately 13 per cent of the S&P 500 index – whereas stock prices of corporations in sectors

with more weight in the index (financial, technology, health and industry sectors) recorded rather

moderate growth.

Long-term interest rates were kept at historical lows in 2005, although rising slightly in the second half

of the year (Chart 1.8). The persistence of low long-term interest rates can be explained by a number of

factors, which may be divided into two sets of arguments. A first set of arguments relates the yield be-

haviour to macroeconomic prospects, wherefore the present level of long-term interest rates seems to

reflect stable inflation expectations, which have been anchored at moderate levels. A second set of ar-

guments emphasise developments in the net demand for longer-maturity assets, affecting the maturity

premium (which compensates investors for long-term investments). The decrease in the maturity pre-

mium required by investors has been the most frequently indicated reason for the low level of

long-term interest rates. This decline in the maturity premium may be explained by a number of factors,

whose relative importance is difficult to assess. First, long-term securities may have become relatively

more attractive due to a lower volatility of economic activity and higher inflation stability than in the re-

cent past. Second, and chiefly in the US, larger demand for government securities seems to be related

to purchases made by several central banks in Asia and, more recently, by oil-exporting countries, in

the context of the management of their respective exchange-rate policies. Third, the increase in the

weight of institutional investors in financial markets (insurance corporations and pension funds) privi-

leging the holding of long-term instruments with relatively reduced levels of risk (in order to balance the



20

Chart 1.8

YIELDS ON 10-YEAR BONDS

Monthly averages

0

2

4

6

8

10

12

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05

Pe

rce

nt

Euro area US

Source: Bloomberg.

duration of their assets and future liabilities) has also given rise to an increase in demand in the bond

market. Finally, the supply of US long-term Treasury securities has not met demand, widening the

imbalance between demand and supply. However, this imbalance has been partly offset by the

issuance of long-term private debt.

The spreads between private debt yields and government debt yields continued to be contained in the

course of 2005, reflecting the favourable economic growth prospects as well as positive corporate re-

sults. The second quarter of 2005, however, was marked by an increase in these spreads, in particular

for issuers with lower credit quality, which was largely associated with developments in automobile

sector corporations (Chart 1.9).5

Bond market spreads stabilised gradually after June. In the latter

months of 2005, non-financial corporate bond spreads increased again slightly, which may reflect the

start of a reversion in the credit cycle, chiefly in the US.

Persistently low yields in private debt markets in major advanced economies and low volatility levels

throughout most of 2005 continued to stimulate investor search-for-yield. Emerging markets have thus

continued to benefit from very favourable financing conditions for debt issuance, with the latter reach-

ing much higher levels than those observed in the previous year. The spreads between the sovereign

debt of these economies and US Treasury securities narrowed further in 2005 to historical lows, also

reflecting the improvement in the financial situation of corporations and of economic fundamentals in a

large number of emerging market economies in recent years (Chart 1.10).



21

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


Pe

rce

nta

ge

po

ints

Euro area AA Euro area BBB

US AA US BBB

Chart 1.9

SPREADS BETWEEN GOVERNMENT AND PRIVATE

DEBT BOND YIELDS

Source: Bloomberg.

(5) In May, the rating of General Motors and Ford was downgraded, as a result of the low levels of profitability of these corporations, associated with a heavy

cost structure. These downgradings fuelled a significant increase in the volume of traded debt with the worst ratings,giving rise to some disturbances in the

markets.



22

Chart 1.10

INTERNATIONAL DEBT INSTRUMENTS ISSUED BY

EMERGING MARKET ECONOMIES

Net issues

-20

0

20

40

60

80

100

1998 1999 2000 2001 2002 2003 2004 2005

US

Db

illio

ns

Africa and Middle East

Asia and the Pacific

Europe

Latin America

Source: BIS.

EMERGING MARKET DEBT SPREADS(a)

0

2

4

6

8

10

12

14

16

18

20

Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05

Pe

rce

nta

ge

po

ints

M

Mexican crisis

Russian crisis

Asian

crisisAverage

1991-2005

Source: JP Morgan.

Note: (a) Yield spread between emerging market sovereign issuers (EMBI/EMBI+) and

US Treasury Securities. 5 day moving averages.



23

Box 1.1 Intensification of the Globalisation Process

Globalisation is a general term used to designate the growing process of international economic integration, cover-

ing the significant rise in trade of goods and services and increasing cross-border factor mobility.1

Globalisation is

not a recent phenomenon but intensified as of the early 1990s. In 1990-2005, the average growth of world trade of

goods and services increased and continued to exceed world output growth.2

Trade openness has thus increased

significantly both in advanced economies and in major emerging market economies. Financial openness also

gained ground in the two groups of countries as of the early 1990s. This reflects, to a large extent, the strong in-

crease in world flows of foreign direct investment, which determined that the stock, as a percentage of GDP, nearly

tripled from 1990 to 2005 (Charts 1 to 3).

This acceleration in the globalisation process reflects a number of factors of a political and/or economic and even

technological nature.

First, the increased integration of the different economies was the result of progress in the liberalisation of world

trade and capital movements and was made possible by technological progress that implied a significant decrease

in transport and communication costs.

Second, the increased globalisation reflects the growing openness of developing and emerging market economies

- in many cases in the wake of political and economic reforms - with special emphasis on large economies such as

China and India and Central and Eastern European countries. The group of developing and emerging market

economies has been posting a strong increase in activity and in international trade of goods and services, which is

reflected in a rise in its economic relevance at global level. Over the last 15 years, GDP in this group of countries in-

creased at an average annual rate of 4.8 per cent, significantly above total world growth (3.5 per cent). Real growth

of exports and imports of goods and services in this group of countries has also exceeded world growth since the

early 1990s and, more markedly, in most recent years (Table 1). As far as foreign direct investment is concerned, in

spite of an increase in absolute terms, flows to developing countries still have a relatively reduced weight in total

Chart 1

TRADE AND FINANCIAL OPENNESS

Advanced economies(c)

0

20

40

60

80

100

120

140

1970 1975 1980 1985 1990 1995 2000 2005

Pe

rce

nt

20

25

30

35

40

45

50

Per

cent

Financial openness(b)

Trade openness(a)

(RHS)

Developing and emerging market economies(d)

0

5

10

15

20

25

30

35

40

45

1970 1975 1980 1985 1990 1995 2000 2005

Pe

rce

nt

10

20

30

40

50

60

70

Pe

rce

nt

Financial openness(b)

Trade openness(a)

(RHS)

Source: IMF.

Notes: (a) Measured as the sum of exports and imports as a percentage of GDP (5-year moving average). (b) Measured as the sum of the outstanding amounts of foreign assets and lia-

bilities of direct and portfolio investment as a percentage of GDP. (c) Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxem-

bourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and United States. (d) Argentina, Brazil, Chile, China, Colombia, Czech Republic, Dominican

Republic, Ecuador, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey and Venezuela.

(1) For a more detailed analysis of the globalisation phenomenon, see European Commission (2005), “The EU Economy 2005 Review: Rising International Economic Integration - Op-

portunities and Challenges”.

(2) Average growth of world trade of goods and services went up from 5.5 per cent in the 1970-1989 period to 6.5 per cent in the 1990-2005 period. In both sub-periods, the average

pace of growth of trade exceeded world output growth. However, the ratio between these two average growth rates increased from 1.2 to 1.8 from 1970-89 to 1990-2005.



24

flows (Chart 4). Over the last decades, foreign direct investment flows towards developing countries underwent an

important reallocation, with China absorbing an increasing share.

Finally, the emergence of these new economies with abundant labour has reinforced the trend towards the reor-

ganisation of productive processes on a global basis with a view to reducing costs. In particular, the most recent

period saw an increase in transfers of industrial activities and labour-intensive business services from most ad-

vanced economies to countries with lower production costs (this is usually known as relocation). This transfer is

chiefly the result of two mechanisms: “outsourcing”, which consists in contracting part of the productive process

with foreign suppliers, covering the production of parts, components or semi-finished products, as well as services

or “offshoring”, i.e., the relocation of part of or the whole production abroad, creating new corporations through for-

eign direct investment. This growing geographical fragmentation of productive processes can be observed either in

the above mentioned increase in foreign direct investment flows, or in the growing volume of trade of intermediate

goods and business services. Recently, trade of intermediate goods has accompanied the buoyancy of total

trade.3

In turn, whereas world transactions of services have evolved at a pace similar to trade of goods, some ser-

Chart 2

WORLD TRADE AND GDP

In volume

100

200

300

400

500

600

700

800

1970 1975 1980 1985 1990 1995 2000 2005

19

70

=1

00

World trade of goods and

services

World

GDP

Source: IMF.

Chart 3

FOREIGN DIRECT INVESTMENT

Total as a percentage of world GDP

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005

Pe

rce

nt

0

1

2

3

4

5

Pe

rce

nt

Stock

Flows (RHS)

Source: UNCTAD.

Table 1

TRADE OF GOODS AND SERVICES

Rate of change in volume

Per cent

Exports Imports

1980-1989 1990-1999 2000-2005 1980-1989 1990-1999 2000-2005

World 4.4 6.7 6.4 4.6 6.3 6.6

Advanced economies 5.1 6.5 5.1 5.2 6.4 5.4

Developing and emerging market

economies 2.5 7.3 10.0 2.7 6.1 10.5

of which:

Asian developing countries 7.0 12.4 14.4 6.5 9.6 13.7

Central and Eastern Europe 2.8 7.5 10.5 2.2 9.6 9.5

Source: IMF.



25

vices were more buoyant, in particular services supplied by corporations (notably computer and information

services) (Chart 5).

Globalisation affects national economies through a number of channels. For consumers, the increase in interna-

tional competition associated with the intensification of the globalisation process translates into a decline in prices

of several types of consumer goods and in an increase in choice. For companies, the new framework implies the

Chart 4

FOREIGN DIRECT INVESTMENT INFLOWS

As a percentage of world total

1980-1989

77%

2%

21%

1990-1999

70%

7%

23%

73%

12%

15%

2000-2005

Developed economies

China

Other developing economies

Source: UNCTAD.

Chart 5

WORLD EXPORTS OF SERVICES

Annual average change 1996-2003

0 5 10 15 20 25 30

Construction services

Government services

Travel

Transportation services

Total

Other business services

Communication services

Royalties and license fees

Financial services

Insurance services

Personal, cultural and

recreational services

Computer and information

services

Per cent

Source: CHELEM Database.

(3) The weight of world exports of intermediate goods in total traded goods remained virtually unchanged between 1993 and 2004 at around 20 per cent (source: CHELEM database). It

should be noted, however, that a number of estimates indicate that around 30 per cent of world trade in manufactured goods consists of intermediate goods and non-finished prod-

ucts (See Yeats (1998), “Just how big is global production sharing?”, World Bank Policy Research Paper nº 1971).



26

need to contain costs and to reconvert production, thereby obtaining efficiency gains. The increase in competitive

pressures also gives rise to more incentives to innovation which, associated with the dissemination of new technol-

ogies and organisation practices, contributes to raising productivity. In parallel, there are also new investment and

trade opportunities associated with the increase in market size. Growing economic integration worldwide offers po-

tential benefits to all economies, i.e., an overall improvement of welfare of the economic agents as a whole. How-

ever, the acceleration of globalisation implies quick changes in comparative advantage, which may have important

transition costs at sectoral level.

In order to maximise gains stemming from globalisation, product and labour markets must have a high adjustment

capacity. It is therefore necessary to adopt structural reforms that raise labour market flexibility and foster

higher-quality job creation - particularly through the elimination of obstacles to workers’ mobility among sectors -

so as to promote the transfer of productive resources to activities with higher value-added and stronger demand. In

order to take advantage of the opportunities created by a larger and more buoyant global economy, other reforms

should also be implemented, intended to develop investment in human capital, including training and

requalification of the workers. The emergence of activities with higher value added also requires an appropriate in-

stitutional framework - namely without excessive or unnecessary burdens on corporations and on job supply, facili-

tating the entry and exit of firms - as well as a framework that promotes investment in research and innovation.



27

Box 1.2 Growth and Inflation Differentials in the Euro Area

The purpose of this box is to document the recent developments of growth and inflation differentials across euro

area countries and to refer briefly to the factors that may have been behind those differentials, based on the results

obtained from a number of studies.1

It is important to note that these growth and inflation divergencies are to be ex-

pected in a monetary union between different economies subject to asymmetric shocks. That is not necessarily an

obstacle to a proper functioning of the monetary union.

In 2005 the dispersion of growth in the euro area (evaluated by the weighted standard deviation) remained at a

level close to that observed in the previous year. This indicator does not point to a clear downward or upward trend

over the last decade (Chart 1).2

In addition, the dispersion in the euro area is similar to the one observed in other

monetary unions.3

However, growth differentials across the euro area economies have proved relatively persis-

tent. In 2000-2005, growth in three countries was systematically below that recorded in the euro area: Germany, It-

aly and the Netherlands (Chart 2).4

Excluding 2001, Portugal showed the same type of behaviour. In contrast, in

Spain, Greece and Ireland, GDP growth has largely exceeded the euro area average (as in Finland, excluding

2001).

Turning to inflation, the dispersion across the different euro area countries in 2005 remained historically low, at a

level close to that observed in the most recent period (Chart 1). However, as with GDP growth, inflation diver-

gences across euro area countries have been relatively long lasting, implying significant changes in bilateral real

(1) For some more recent references, see:

- Angeloni, I. and M. Ehrmann (2004), “Euro area inflation differentials”, European Central Bank Working Paper Series no. 388, September;

- ECB (2003), “Inflation differentials in the euro area: potential causes and policy implications”, report published on 30 September;

- Benalal, N., J.L. Diaz del Hoyo, B. Pierluigi and N.Vidalis (2006), “Output growth differentials across the euro area countries some stylised facts”, European Central Bank Occa-

sional Paper Series no. 45, May;

- European Commission (2005), Focus: Growth differences in the Euro Area, Quarterly Report on the Euro Area - Volume 4, no. 2;

- Lane, P.(2006), “The real effects of EMU”, CEPR Discussion Paper no. 5536, March.

(2) This conclusion is not changed if a longer period is considered.

(3) In particular, the differences in growth rates among euro area countries are similar to the ones historically observed among US regions or the former West Germany (Benalal et al.

(2006) and European Commission (2005)).

(4) In the case of Germany and Italy, this negative growth differential vis-à-vis the euro area has been observed since 1996.

Chart 1

DISPERSION OF THE YEAR-ON-YEAR RATE OF

CHANGE OF GDP ACROSS EURO AREA

COUNTRIES

(Weighted standard deviation)

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1996 I 1997 III 1999 I 2000 III 2002 I 2003 III 2005 I

Pe

rce

nt

DISPERSION OF THE YEAR-ON-YEAR RATE OF

CHANGE OF THE HICP ACROSS EURO AREA

COUNTRIES

(Weighted standard deviation)

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-96 Jul-97 Jan-99 Jul-00 Jan-02 Jul-03 Jan-05

Pe

rce

nt

HICP exc. unprocessed food and energy

HICP

Sources: European Commission, Eurostat and Banco de Portugal calculations.



28

exchange rates (Charts 2 and 3). Four countries in particular (Ireland, Greece, Spain and Portugal) have recorded

a positive inflation differential vis-à-vis the euro area in recent years. It is worth mentioning, however, that in the

Portuguese and Irish case, this differential declined significantly in 2004, and was virtually nil in 2005. In contrast, in

Germany and Austria, the inflation differential was negative every year from 2000 to 2005. In any case, in some

countries (the Netherlands and Finland) inflation differentials vis-à-vis the euro area average reversed in this

period, moving from positive to negative.

Chart 2

GDP GROWTH RATE – DIFFERENTIAL

VIS-À-VIS THE EURO AREA

-3

-2

-1

0

1

2

3

4

5

6

Germ

any

Italy

Port

ugal

The

Neth

erlands

Belg

ium

Austr

ia

Fra

nce

Fin

land

Spain

Luxem

bourg

Gre

ece

Irela

nd

Inperc

enta

ge

poin

ts

2000 2001

2002 2003

2004 2005

HICP ANNUAL RATE OF CHANGE – DIFFERENTIAL

VIS-À-VIS THE EURO AREA

-3

-2

-1

0

1

2

3

4

Germ

any

Fin

land

Austr

ia

Fra

nce

Belg

ium

Italy

The

Neth

erlands

Luxem

bourg

Port

ugal

Spain

Gre

ece

Irela

nd

Inperc

enta

ge

poin

ts

2000 2001

2002 2003

2004 2005

Sources: European Commission and Eurostat.

Note: Countries are listed in increasing order of average growth/inflation differentials for the 2000-2005 period.

Chart 3

REAL EXCHANGE RATE VIS-À-VIS THE OTHER

EURO AREA 11 COUNTRIES

Based on the HICP

94

96

98

100

102

104

106

108

110

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

Jan

2000=

100

Ireland

Italy

Greece

Spain

Portugal

Finland

Belgium

Luxembourg

o FranceAustria

Germany

The Netherlands

Source: European Commission.



29

Heterogeneity in the euro area in terms of growth and inflation is the result of both structural factors, including those

affecting the adjustment mechanisms, and cyclical factors. However, the persistence of growth and inflation differ-

entials points to a predominance of structural factors. Indeed, different studies suggest an increase in the degree of

synchronisation of economic cycles among euro area countries since the early 1990s. Structural differences

across economies - in terms of initial levels of income per capita, demography, specialisation patterns, structural

policies in factor and output markets, and institutions – imply disparities in trend output and productivity growth.

These structural differences may also imply some asymmetry in the degree of exposure to world shocks and in the

operation of adjustment mechanisms. The significant increase in oil prices in the recent period is an example of a

common shock that may raise dispersion in the euro area, given the higher relative impact on countries that are

more dependent on and/or less efficient in the use of this commodity. Other examples of shocks liable to give rise

to relatively persisting differences across the economies are the increase in the rate of penetration of imports from

Asia in the textile, clothing and footwear sector, the enlargement of European Union or the implementation of

pro-cyclical fiscal policies. The more persistent divergences are also related to the growing financial integration

associated with monetary union, which allows countries to incur larger current account imbalances for longer

periods.

There are two important transmission channels of asymmetric shocks in a monetary union: real interest rates and

competitiveness. On the one hand, since the nominal interest rate is determined at euro area level, a country with

higher inflation faces lower real interest rates.5

If the economic agents of that country respond to lower real interest

rates by investing and consuming more, accrued pressures on demand will emerge in that economy, which will

tend to widen the inflation differential. On the other hand, the real exchange rate will post a gradual appreciation

that, as long as it does not reflect an equilibrium movement, will induce a loss of competitiveness, which will con-

tribute to moderate demand growth. However, only as the effects of losses in competitiveness become predomi-

nant can growth and inflation differentials gradually fade. This competitiveness adjustment mechanism depends

crucially on labour and product market flexibility. In the euro area, such adjustment has been slow, against the

background of reduced price and wage flexibility, which implies a higher persistence of disparities across

economies.

Evidence suggests that structural reforms are necessary in some countries, leading to an improvement in the re-

sponse of real wages to economic conditions and promoting a higher degree of competition in the markets for

goods and services. Slow adjustment to shocks may translate into relatively long periods of low economic growth

and high unemployment or overheating of the economy.

The German case illustrates how slow the operation of the competitiveness-adjustment mechanism can be. Upon

the creation of the euro area, this economy faced a serious competitiveness problem, to a large extent associated

with the behaviour of wages in the wake of German reunification. The ensuing adjustment implied restrictions to

wage increases, which were reinforced by the impact of European Union enlargement. Moderate wage growth and

the restructuring in progress in the economy translated into weak growth of domestic demand, leading to lower in-

flation than in the euro area.This low inflation rate, coupled with a common nominal interest rate for the euro area,

implied real interest rates that, notwithstanding being at relatively low levels by historical standards, have been

above the euro area average. Lower relative inflation of prices and wages as well as productivity gains, however,

have translated into an improvement in competitiveness and into strong growth of German exports (Chart 4). This

process of improvement in competitiveness is still in progress, and has had no impact as yet on domestic demand.

In other countries, particularly Portugal and Italy, it seems that the adjustment has not yet started. Although growth

of domestic demand in these economies has also been lower than in the euro area in 2000-2005, inflation and

wage increases continue to be above the euro area average. This led to a marked deterioration of competitiveness,

with implications on export growth. Given the composition of their exports, these countries were also especially af-

fected by the increased competition from the emerging market economies. The necessary sectoral restructuring in

both economies will be facilitated by an extended period of unit labour cost growth below that in the euro area, ei-

ther through an increase in productivity, or by containing wage developments.

(5) Inflation expectations should be taken into account in the computation of real interest rates. The closer these expectations are to the euro area average, the smaller will be the cross

country differences of real interest rates.



30

The factors underlying growth and inflation differentials across euro area economies are quite complex, and re-

quire an assessment on a case-by-case basis. Ireland, for instance, stands out as the economy with the most sig-

nificant real appreciation - measured by relative unit labour costs - but where exports continued to grow noticeably

vis-à-vis the euro area average (Chart 4). These developments seem to reflect, inter alia, significant productivity

gains in the tradable goods sector, corresponding to a large extent to an equilibrium movement.

Chart 4

EURO AREA COUNTRIES

Developments of the real exchange rate(a)

and exports

2000-2005 average

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-5 -4 -3 -2 -1 0 1 2 3

Export growth differential vis-à-vis the euro area

Re

ale

xch

an

ge

rate

ch

an

ge

Ireland

PortugalItaly

Spain

Greece

Germany

France

Austria

Belgium

Finland

The Netherlands


and

domestic demand

2000-2005 average

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-2 -1 0 1 2 3 4

Domestic demand growth differential vis-à-vis the euro area

Re

ale

xch

an

ge

rate

ch

an

ge

Ireland

Portugal

Italy Spain

Greece

Germany

France

Austria

Belgium

Finland

The Netherlands


and

private consumption

2000-2005 average

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-2 -1 0 1 2 3 4

Private consumption growth differential vis-à-vis the euro

area

Re

ale

xch

an

ge

rate

ch

an

ge

Ireland

PortugalItaly

Spain

Greece

Germany

France

Austria

Belgium

Finland

The Netherlands


and

GFCF

2000-2005 average

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-4 -2 0 2 4 6

GFCF growth differential vis-à-vis the euro area

Re

ale

xch

an

ge

rate

ch

an

ge

Ireland

PortugalItaly

Spain

Greece

Germany

France

Austria

Belgium

Finland

The Netherlands

2. ECONOMIC POLICIES AND STRUCTURAL ISSUES

2.1. The Monetary Policy of the ECB and Monetary and Financial Conditions of the

Portuguese Economy

Monetary Policy of the ECB

During the first eleven months of 2005 official interest rates in the euro area remained unchanged at

the levels established in June 2003 (Table 2.1). On 1 December 2005 the Governing Council of the

ECB decided to increase official interest rates by 25 b.p., setting the minimum bid rate on the main refi-

nancing operations at 2.25 per cent.1

In early 2005 the outlook for inflation in the euro area was favourable. Although the inflation rate was

expected to stand at slightly above 2 per cent in the first few months of the year, medium-term projec-

tions pointed to lower inflation levels. These projections relied on the assumption that the oil price

would stabilise at the 40-45 USD/barrel range in 2005-2006 and on expectations of a gradual rebound

in economic activity and the maintenance of moderate wage growth. According to the assessment of

the Governing Council of the ECB, there was no significant evidence of accumulated domestic infla-

tionary pressures – in particular, inflation expectations remained contained –, and therefore the mone-

tary policy stance remained appropriate. Maintaining official interest rates at low levels gave support to

the economic recovery in the euro area. However, a constant vigilance was warranted given upside

risks to price stability in the medium term.

The possibility of more unfavourable oil price developments than implied in futures markets was the

main risk to projections. The materialisation of this risk – the oil price reached very high levels in the

course of 2005 (see “Chapter 1 International Environment”) – contributed to the more unfavourable

than expected behaviour of economic activity and prices in the euro area in 2005. High oil prices in

2005 and the prospect that they would remain elevated in 2006 led to the downward revision of growth


Economic Policies and Structural Issues | Chapter 2

31

Table 2.1

INTEREST RATES OF THE EUROPEAN CENTRAL BANK

Per cent

Decision date Deposit facility Main refinancing operations Marginal lending facility

5 Oct. 2000 4.75 5.75

10 May. 2001 3.50 4.50 5.50

30 Aug. 2001 3.25 4.25 5.25

17 Sep. 2001 2.75 3.75 4.75

8 Nov. 2001 2.25 3.25 4.25

5 Dec. 2002 1.75 2.75 3.75

6 Mar. 2003 1.50 2.50 3.50

5 Jun. 2003 1.00 2.00 3.00

1 Dec. 2005 1.25 2.25 3.25

2 Mar. 2006 1.50 2.50 3.50

8 Jun. 2006 1.75 2.75 3.75

Source: ECB.

(1) The ECB reference rates were further increased by 25 b.p. at both the March and June 2006 meetings.

projections and, together with the depreciation of the euro, to the upward revision of inflation

projections throughout the year (Chart 2.1).

The risks to price stability intensified in the course of the year, namely those associated with possible

second-round effects on the behaviour of prices and wages stemming from oil price increases, in a

context of some strengthening of economic activity. This rise in risks led the Governing Council of the

ECB to be strongly vigilant as from the end of the summer of 2005. This attitude was also warranted by

the situation of ample liquidity prevailing in the euro area, given the buoyancy of monetary and credit

aggregates. In this context, in early December (and again in March and June 2006) the Governing

Council decided to increase the ECB reference rates, with the purpose of contributing to maintaining

medium to long-term inflation expectations firmly anchored at levels consistent with price stability. In

spite of these increases, nominal and real interest rates in the euro area remained at very low levels.


Chapter 2 | Economic Policies and Structural Issues

32

Chart 2.1

EUROSYSTEM PROJECTIONS – ASSUMPTIONS

FOR THE OIL PRICE

EUROSYSTEM PROJECTIONS – ASSUMPTIONS

FOR THE NOMINAL EFFECTIVE EXCHANGE RATE

OF THE EURO(a)

0

10

20

30

40

50

60

70

Assumption for 2005 Assumption for 2006

US

D/b

arr

el

In Mar 2005 In Jun 2005

In Sep 2005 In Dec 2005

100

101

102

103

104

105

106

107

Assumption for 2005 Assumption for 2006

19

99

1stQ

=1

00

In Mar 2005 In Jun 2005

In Sep 2005 In Dec 2005

EUROSYSTEM PROJECTIONS – GDP GROWTH

Range and mid-point of the projection

Note: (a) A lower value denotes a higher depreciation of the euro effective rate of change.

EUROSYSTEM PROJECTIONS – INFLATION

Range and mid-point of the projection

1.41.3

1.51.6

1.21.1

11.2

2.42.3

2.52.6

2

1.71.6 1.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar-05 Jun-05 Sep-05 Dec-05 Mar-05 Jun-05 Sep-05 Dec-05

Pe

rce

nt

Projection for 2005 Projection for 2006

1.6

1.8

2.1 2.1

10.9

1.4

1.6

2.2 2.22.3 2.3

2.22.1

2.4

2.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar-05 Jun-05 Sep-05 Dec-05 Mar-05 Jun-05 Sep-05 Dec-05

Pe

rce

nt

Projection for 2005 Projection for 2006

Source: ECB.

In the foreign exchange market the appreciation of the euro seen in previous years was reversed (Ta-

ble 2.2). The European currency depreciated by around 7 per cent in nominal effective terms between

late 2004 and late 2005. The weakening of the euro was particularly significant against the US dollar

(13.4 per cent). This might be associated with the maintenance of a positive differential between the

growth rates of the US and the euro area economies and the widening of the differential between their

respective interest rates. The euro also depreciated against the pound sterling and the Japanese yen

(2.8 and 0.5 per cent respectively, considering end-of-period figures). Among the remaining currencies

with relevant weight in the effective exchange rate index basket, reference should be made to the de-

preciation against the Chinese currency (15.4 per cent) and the virtual stability against the Swiss franc.

In the course of 2005, credit demand by the private sector in the euro area accelerated, boosted by the

low levels of nominal and real interest rates and by the gradual improvement of confidence and activity

in the various sectors of the economy. The year-on-year growth of loans to non-financial corporations

rose from 5.4 per cent at end-2004 to 8.3 per cent at end-2005. According to the bank lending survey

for the euro area, investment financing was one of the factors that started to be mentioned as a driver

of this growth, which is consistent with developments in gross fixed capital formation in the euro area in

2005 (Chart 2.2). Loans to households also accelerated, in particular loans for house purchase, with a

growth rate that reached 11.5 per cent at the end of 2005 (Table 2.3).



33

Table 2.2

EURO AREA – EXCHANGE AND INTEREST RATES

Per cent

Averages End of period

2003 2004 2005 2005 I 2005 II 2005 III 2005 IV

Exchange rates(a)

– Rate of change

EER-EUR(b)

12.0 4.0 -0.9 -2.7 -3.6 -0.1 -0.8

EUR/USD 19.6 10.0 0.0 -4.8 -6.7 -0.4 -2.0

EUR/GBP 10.0 -1.9 0.8 -2.3 -2.1 1.1 0.5

EUR/JPY 10.9 2.7 1.8 -0.9 -3.2 1.7 1.9

EUR/CNY(c)

19.6 10.0 -1.0 -4.8 -6.7 -2.6 -2.3

EUR/CHF 3.7 1.5 0.3 0.4 0.1 0.4 -0.1

Interest rates

Overnight (EONIA) 2.3 2.0 2.1 2.1 2.2 2.2 2.4

1-month Euribor 2.3 2.1 2.1 2.1 2.1 2.1 2.4

3-month Euribor 2.3 2.1 2.2 2.2 2.1 2.2 2.5

6-month Euribor 2.3 2.1 2.2 2.2 2.1 2.2 2.6

12-month Euribor 2.3 2.3 2.3 2.4 2.1 2.3 2.8

12-3 month (basis points) 0 17 15 21 -3 14 35

10-year government bond yield 4.2 4.1 3.4 3.7 3.2 3.2 3.4

Sources: Bloomberg and ECB.

Notes: (a) A positive change denotes an appreciation of the euro. (b) Weights in trade with the euro area: United States (26.19 pre cent), United Kingdom (19.18 per cent), Japan (11.45

per cent), China (6.93 per cent) and Switzerland (6.31 per cent). (c) From 1 April de 2005 onwards the ECB started to release benchmark rates for the Chinese renminbi (EUR/CNY). Up to

this date, rates are indicative.

Monetary and Financial Conditions of the Portuguese Economy

In 2005 the monetary conditions of the Portuguese economy remained overall favourable to economic

activity growth. They also continued to make a positive contribution to the reduction of inflation, via the

lagged effects of the appreciation of the euro in previous years. In fact, according to estimates based

on a monetary conditions index, interest rate developments in recent years have had a positive cumu-



34

Chart 2.2

FACTORS BEHIND THE DEMAND FOR LOANS IN THE EURO AREA

Non-financial corporations

-30%

-20%

-10%

0%

10%

20%

30%

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

Ba

lan

ce

of

resp

on

de

nts

Investment

financingFinancing needs for

inventories and

working capital

Financing of

mergers/acquisitions

and corporate

restructuring

Debt reestructuring

Households

(for house purchase)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

Ba

lan

ce

ofre

sp

on

de

nts

Outlook for the housing

marketConsumer

confidence

Consumer spending Household

savings

Source: ECB (Bank Lending Survey in the euro area).

Table 2.3

EURO AREA – MONETARY AND CREDIT AGGREGATES

Year-on-year rates of change

Per cent, end-of-period

2003 2004 2005

I II III IV

Monetary aggregates(a)

M1 10.6 8.9 9.2 10.9 11.1 11.4

Currency in circulation 25.2 17.4 17.7 17.1 15.3 14.0

Overnight deposits 8.5 7.5 7.8 9.8 10.3 10.9

M2 7.6 6.7 7.1 8.1 8.8 8.5

Other short-term deposits (M2-M1) 4.6 4.3 4.9 5.1 6.4 5.4

M3 7.1 6.6 6.5 7.6 8.4 7.4

Marketable instruments (M3-M2) 3.9 6.3 2.8 5.1 6.0 1.0

Credit aggregates

Credit to general government(a)

6.3 2.4 2.4 1.2 1.4 4.0

Credit to other euro area residents(a)

5.8 7.1 7.5 8.2 9.1 9.4

Loans to other euro area residents(a)

5.5 7.2 7.6 8.1 8.8 9.2

Memo:

Sectoral breakdown of loans

Non financial corporations 3.5 5.4 5.9 6.5 7.3 8.3

Households 6.4 7.9 8.0 8.4 8.6 9.4

Consumer credit 2.8 5.7 6.2 6.7 7.2 7.8

Loans for house purchase 8.1 10.1 10.1 10.5 10.6 11.5

Source: ECB.

Note: (a) Seasonally-adjusted.

lative impact on GDP growth in 2005, although developments in the effective exchange rate index for

Portugal had partly countered this effect (Chart 2.3).

Short and long-term interest rates remained at low levels and followed a downward trend in the first half

of 2005. This pace was changed in the second half of the year, with a particularly noticeable rise in

money market rates in anticipation of the increase in the ECB reference interest rates, which material-

ised in December. Bank interest rates accompanied developments in money market rates with a slight

lag and, in general, declined somewhat over the first three quarters, reversing this trend in the last

quarter of the year (Table 2.4 and Chart 2.4). In the loans for house purchase segment, the interest

rate on outstanding amounts declined by 12 basis points up to late October, when it reached a trough

of around 3.6 per cent. This reflected a further squeeze of the interest rate margin in this business seg-

ment, where competition remained strong. Despite the reversal in the trend of bank interest rates in the

last quarter of 2005, the interest margin of loans for house purchase continued to squeeze up to the

end of the year (Chart 2.5). Interest rates on outstanding amounts of bank loans to non-financial corpo-

rations, consumer credit to households and loans to households for purposes other than house pur-

chase followed a more irregular pattern (especially in the first few months of the year). Although these

rates declined up to the end of September, these developments were, to a large extent, less marked

than in the case of loans for house purchase. In turn, the average interest rate on outstanding amounts

of deposits of the non-financial private sector remained lower than the inflation rate.

The credit standards applied by banks to the approval of loans to the non-financial private sector ap-

parently did not also restrain access to the credit market by Portuguese companies and households.

Hence, according to the bank lending survey results for Portugal, the conditions of access by non-fi-

nancial corporations to bank credit have remained broadly unchanged over the year, irrespective of

the size of the company and the maturity of loans (Chart 2.6).2

Nonetheless, and despite the fact that

the perception of risks associated to both the general economic activity and to specific sectors and

companies contributed to a tightening of credit standards applied to the approval of bank loans, the



35

Chart 2.3

CONTRIBUTION OF MONETARY CONDITIONS

For the GDP growth rate

-0.5

0.0

0.5

1.0

1.5

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nta

ge

po

ints

For the inflation rate

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nta

ge

po

ints

Effects of the interest rate changes occurred during the three years before the reference period

Effects of the exchange rate changes occurred during the three years before the reference period

Source: Banco de Portugal.

Note: For detailed information on this index, see Esteves, Paulo Soares (2003). “Monetary conditions index for Portugal”, Economic Bulletin, June, Banco de Portugal.

(2) The results mentioned refer to the five Portuguese banking groups integrating the survey sample for the euro area. The detailed results of quarterly surveys

are available on the Banco de Portugal’s website (www.bportugal.pt).

terms and conditions effectively applied to average-risk companies have eased somewhat in compari-

son with the previous year (particularly in terms of spreads and commissions and other non-interest

rate charges). With regard to loans to households, developments were distinct. In the case of loans for

house purchase, the credit standards applied by some of the respondent banks eased somewhat in

the course of the year, chiefly as a reflection of pressure from competition from other banks (Chart 2.7).

The easing of the credit supply in this market segment translated in particular into the lengthening of

maturities (already indicated in the previous year) and into the narrowing, albeit slight, of the spread

applied to average-risk loans (as previously referred to in the context of developments in bank interest

rates). With regard to consumer credit, there have been no relevant changes in the credit policy of Por-

tuguese banks, although competitive pressure may have contributed to an easing of credit standards

also in this market segment. However, a more pessimistic assessment than in the previous year re-

garding the ability of customers to service debt and regarding general economic activity seems to have

limited changes in the terms and conditions practiced by respondent institutions.

As a reflection of the favourable supply conditions in the credit market, the rate of change in loans

granted to households by resident financial institutions3

rose slightly in 2005, to stand close to 11 per

cent in December, mainly as a result of continued high growth in loans for house purchase (11.5 per



36

Table 2.4

MONETARY AND FINANCIAL CONDITIONS OF THE PORTUGUESE ECONOMY

Average values in the period

2003 2004 2005 2005

I II III IV

Interest rates – Per cent

3-month Euribor 2.3 2.1 2.2 2.1 2.1 2.1 2.3

10-year Treasury bond yields 4.2 4.1 3.4 3.6 3.3 3.3 3.5

Interest rates on outstanding amounts of bank loans

Non-financial corporations 4.6 4.4 4.3 4.3 4.3 4.3 4.3

Households

For house purchase 4.3 3.8 3.7 3.8 3.7 3.7 3.7

For consumption and other purposes 7.9 7.8 7.7 7.7 7.7 7.6 7.7

Interest rate on outstanding amounts of bank deposits(a)

2.2 2.0 2.0 2.0 2.0 2.0 2.0

Stock market

PSI-geral index (percentage change from the previous corresponding

period)

-6.7 27.5 11.3 5.5 -1.1 1.7 6.2

Exchange rates

Nominal effective exchange rate index(b)

100.3 100.9 100.8 101.3 100.8 100.6 100.4

Percentage change from the previous corresponding period 2.6 0.7 -0.2 0.0 -0.5 -0.2 -0.2

Loans granted by resident financial institutions to the non-financial private

sector (annual rate of change)(c)

7.7 6.7 7.8

Households 10.1 9.8 10.1

Lending for house purchase 11.8 10.9 11.5

Lending for other purposes 5.3 6.0 5.4

Non financial corporations 5.0 3.2 4.8

Memo:

HICP – Year-on-year rate of change, in percentage 3.3 2.5 2.1 2.1 1.5 2.4 2.6

Sources: Euronext Lisboa, INE, Reuters and Banco de Portugal.

Notes: (a) Average interest rate on deposits and deposit-like instruments, excluding liabilities, deposits redeemable a period of notice and repurchase agreements of up to 2 years of the

non-financial private sector. (b) A positive change denotes an appreciation of the index. Calculations made against a group of 22 trading partners. For a detailed description of the method-

ology, see Gouveia, A. C. and Coimbra, C. (2004). “New effective exchange rate for the Portuguese economy”, Economic Bulletin, December, Banco de Portugal. (c) Loans granted by

resident institutions adjusted for securitisations through non-resident special purpose vehicles. The resident financial institutions aggregate includes other resident monetary financial in-

stitutions and other credit institutions included in the other resident financial intermediaries and financial auxiliaries sector.

(3) The resident financial institutions aggregate includes other resident monetary financial institutions, a sector which is usually referred to in the Monthly

Indicators, and other credit institutions included in the other resident financial intermediaries and financial auxiliaries sector, whose information is available

only on a quarterly basis. For the calculation of rates of change in loans to the non-financial private sector, flows were adjusted by securitisations through

non-resident special-purpose vehicles.



37

Chart 2.4 Chart 2.5

KEY INTEREST RATES AND MONEY MARKET

BANK LENDING RATES

1.5

2.5

3.5

4.5

5.5


Pe

rce

nt


INTEREST RATE MARGINS ON LOANS FOR

HOUSE PURCHASE

1.4

1.61.7

1.31.2

0.9

0

1

2

3

2003 2004 2005 2003 2004 2005

Pe

rce

nta

ge

po

ints

0

2

4

6

Pe

rce

nt

Margin Interest rate (RHS)

Outstanding amounts

at end-period

New business


Note: The interest rate margin implied in outstanding amounts is calculated as the differ-

ence between the interest rate on outstanding amounts and the six-month moving aver-

age of the six-month Euribor. For new business, the interest rate margin is the difference

between the interest rate of new loans and the six-month Euribor.

Chart 2.6 Chart 2.7

CREDIT STANDARDS APPLIED TO THE APPROVAL

OF LOANS TO NON-FINANCIAL CORPORATIONS

AND MAIN DETERMINING FACTORS

CREDIT STANDARDS APPLIED TO THE APPROVAL

OF LOANS TO HOUSEHOLDS FOR HOUSE

PURCHASE AND MAIN DETERMINING FACTORS

1

2

3

4

5

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

General

assessment

Capital cost

(b)

Competition

(b)

Expectations

regarding

general

economic

activity (b)

Activity/firm

specific

outlook (b)

Ge

ne

rala

sse

ssm

en

t(a

)

-2

-1

0

1

2

Fa

cto

rsco

ntr

ibu

tin

gto

su

pp

lyco

nd

itio

ns

[de

via

tio

nfr

om

ne

utr

alva

lue

(3)]


Notes: (a) Average of the responses given by the five major Portugese banking groups in

the Bank Lending Survey for the euro area. Values below 3 represent a tightening from

the previous quarter, whereas values above 3 represent an easing of credit standards. (b)

Right-hand scale.

1

2

3

4

5

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q2

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

General

assessment

Competition (b) Expectations

regarding

general

economic activity

Expectations

regarding

housing market

(b)

Ge

ne

rala

sse

ssm

en

t(a

)

-2

-1

0

1

2

Fa

cto

rsco

ntr

ibu

tin

gto

su

pp

lyco

nd

itio

ns

[de

via

tio

nfr

om

ne

utr

alva

lue

(3)]


Notes: (a) Average of the responses given by the five major Portugese banking groups in

the Bank Lending Survey for the euro area. Values below 3 represent a tightening from

the previous quarter, whereas values above 3 represent an easing of credit standards. (b)

Right-hand scale.

ECB main refinancing operations

3-month Euribor

Interest rate on new loans for house purchase

Interest rate on outstanding amounts of loans for house purchase

Interest rate on outstanding amounts of loans to non-financial corporations

cent). Consumer loans and loans for purposes other than house purchase grew at a more moderate

pace (around 5 per cent), close to that seen at the end of 2004. In turn, the rate of change in the gross

debt of non-financial corporations was higher than that seen in the previous year (by around 1.5 per-

centage points) (Chart 2.8). Also, the growth of loans granted by resident financial institutions to this

sector (close to 5 per cent) was higher than that seen at the end of the previous year (around 3 per

cent) (Table 2.4). The acceleration of lending to corporations was common to most branches of activity

(Table 2.5).

Similarly to other euro area countries, long-term government bond yields continued to follow a down-

ward trend during the first half of 2005. In the second half of the year, the path followed was more

irregular, with a slight increase in the level and volatility of these rates. At the end of the year, the

10-year government bond yield still stood at a slightly lower level than that recorded at the end of 2004.

The yield spread of Portuguese government debt vis-à-vis German government debt followed an up-

ward trend over the first half of the year, in contrast to the decline seen in 2004. These developments

were similar to those in other euro area countries with severe fiscal imbalances – such as Greece and

Italy, the spreads of which are nevertheless higher than those of the Portuguese government debt –

and seem to have been associated with the results of the referendums on the EU Constitutional Treaty

in France and in the Netherlands. The widening of the Portuguese government debt spread also re-

flected expectations of a downward revision of the Standard & Poor’s rating for Portugal (whose out-

look had been negative since October 2004). This revision materialised in late June, jointly with the

change in the prospects regarding the evolution of the Fitch agency’s rating for Portugal (from stable to

negative), and it had, on that occasion, a very moderate impact on the financing costs of the long-term

Portuguese government debt. In fact, in the second half of the year the spread between the Portu-

guese and German government debt yields remained virtually unchanged at levels close to those seen

in mid- 2004 (Chart 2.9).



38

Chart 2.8

LOANS GRANTED BY RESIDENT CREDIT

INSTITUTIONS TO HOUSEHOLDS(a)

Annual rate of change

CREDIT GRANTED TO NON-FINANCIAL

CORPORATIONS


0

5

10

15

20

25

30

1999 2000 2001 2002 2003 2004 2005

Per

cent

House purchase Consumption and other purposes Total


Note: (a) Includes loans granted by resident financial institutions adjusted for securitisa-

tion operations with the intervention of a non-resident financial vehicle.

0

5

10

15

20

25

30

1999 2000 2001 2002 2003 2004 2005

Per

cent

Loans (a) Total gross debt (b)


Notes: (a) Includes loans granted by resident financial institutions adjusted for securitisa-

tion operations with the intervention of a non-resident financial vehicle. (b) Includes loans

granted by resident and non-resident credit institutions; loans/additional capital granted

by non-resident corporations of the same economic group (excluding those granted to

non-financial corporations having their head office in the Madeira’s offshore); commercial

paper and bonds issued by non-financial corporations held by other sectors and trade

credits received from other sectors.

In the stock market, the PSI-Geral index rose by around 17 per cent between early and late 2005, in a

context of low volatility levels. The Portuguese stock market valuation took place mainly in the second

half of the year, and was virtually the same as that seen in 2004. However, it was slightly lower than that

recorded in the same period by the Dow Jones Euro Stoxx index.



39

Chart 2.9

YIELDS OF THE PORTUGUESE GOVERNMENT

DEBT AND SPREAD VIS-À-VIS GERMAN

GOVERNMENT DEBT(a)

0

1

2

3

4

5

6

Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05

Pe

rce

nt

0

5

10

15

20

25

30

Basis

poin

ts

Spread (RHS) Yield

Sources: Reuters and Banco de Portugal.

Note: (a) Yields obtained at close of business. The spread was calculated by interpolating

the German yield curve, so as to ensure that the yield on the Portuguese 10-year bench-

mark bond is compared to a German yield of a comparable maturity.

Table 2.5

LOANS GRANTED BY OTHER MONETARY FINANCIAL INSTITUTIONS TO NON-FINANCIAL CORPORATIONS(a)

Breakdown by sector

Annual rate of change at end-period

2003 2004 2005 Weight in total

loans

2004

Total loans to non-financial corporations 1.8 1.5 4.6 100.0

By sector of activity:

Agriculture, livestock, hunting, forestry and fishing 7.0 2.4 4.7 1.5

Mining and quarrying 14.4 -8.0 0.9 0.5

Manufacturing -1.3 -5.7 -4.6 15.1

Generation and distribution of electricity, gas and water 4.5 -2.3 33.4 1.9

Construction 3.1 4.9 8.6 19.3

Services 2.0 2.5 4.7 61.8

of which:

Real estate activities 11.2 13.6 10.7 15.9

Other services provided mainly to corporations -6.4 -2.0 6.6 13.4


Note: (a) Annual rates of change are obtained from the ratio of the outstanding amounts of bank loans at end-period to transactions, which are calculated from outstanding amounts ad-

justed for reclassifications.

2.2. Fiscal Policy4

Public finances deteriorated in structural terms in 2005, despite the consolidation measures taken in

the second half of the year (see “Box 2.1 The 2005 budgetary outturn”). The general government defi-

cit, on a national accounts basis, stood at 6.0 per cent of GDP, 2.8 p.p. more than in 2004 (Table 2.6

and Chart 2.10), which was largely accounted for by the end of the recourse to temporary measures.

Adjusted for this effect, the increase in the general government deficit reached 0.7 p.p. of GDP, 0.1 p.p.

of which was due to cyclical developments. As interest expenditure went up by 0.1 p.p. of GDP, the pri-

mary balance adjusted for the effects of the cycle and temporary measures, indicator commonly used

to assess the fiscal stance, deteriorated by 0.5 p.p. of GDP. In 2005 fiscal policy was characterised by

strong growth in primary current expenditure and also by an increase in taxation, similarly to the most



40

Table 2.6

MAIN FISCAL INDICATORS

As a percentage of GDP

2000 2001 2002 2003 2004 2005

Overall balance -2.9 -4.3 -2.9 -2.9 -3.2 -6.0

(-) Temporary measures 0.3 0.0 1.3 2.4 2.1 0.0

Overall balance excluding temporary measures -3.2 -4.3 -4.2 -5.3 -5.3 -6.0

(-) Cyclical component(a)

1.4 1.2 0.7 -0.5 -0.5 -0.6

Underlying balance(b)

-4.7 -5.5 -4.9 -4.8 -4.8 -5.4

(+) Interest 3.0 3.0 2.9 2.7 2.6 2.7

Underlying primary balance -1.7 -2.5 -2.0 -2.0 -2.2 -2.7

Public debt 50.5 52.9 55.5 56.9 58.6 64.0

Sources: INE, Ministério das Finanças and Banco de Portugal.

Notes: (a) For details on the methodology, see Neves and Sarmento (2001), “The use of adjusted balances at Banco de Portugal”, Economic Bulletin, September, Banco de Portugal. (b)

The underlying balance corresponds to the balance adjusted for the cycle and for the effects of temporary measures.

Chart 2.10 Chart 2.11

OVERALL BALANCE AND UNDERLYING

BALANCE(a)

OF GENERAL GOVERNMENT IN

PORTUGAL AND OVERALL BALANCE OF

GENERAL GOVERNMENT IN THE EURO AREA

CHANGE IN CYCLICALLY ADJUSTED REVENUE

AND PRIMARY EXPENDITURE

Excluding temporary measures

-7

-6

-5

-4

-3

-2

-1

0

1

2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fG

DP

Change of primary underlying balance

Overall balance (Portugal)

Overall balance (euro area)

Underlying balance (Portugal)

2002

2004

20051999

2001

1997

1998

2000

2003

1996

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-1.0 0.0 1.0 2.0 3.0

Change in the cyclically adjusted revenue,

as a percentage of GDP

Ch

an

ge

inth

ecyclic

ally

ad

juste

dp

rim

ary

exp

en

ditu

re,a

sa

pe

rce

nta

ge

ofG

DP

Increase in the

underlying

primary balance(a)

Decrease

in the

underlying

primary

balance(a)

Sources: European Commission, INE, Ministério das Finanças and Banco de Portugal.

Note: (a) The underlying balance equals the balance adjusted for the cycle and for the ef-

fects of temporary measures.


Note: (a) The underlying primary balance equals the primary balance adjusted for the cy-

cle and for the effects of temporary measures.

(4) For a detailed analysis of fiscal developments in 2005, see “Chapter 6 Public Finances”.444444444444444444444444

recent years (Chart 2.11). The rising trend of primary current expenditure, which was not substantially

contained by the consolidation measures taken since 2002, underlies the current imbalance in public

accounts. In 2005 this variable contributed with around 1.5 p.p. of GDP to the deterioration of underly-

ing balance. Only the increase in the tax burden in recent years has prevented the structural deficit

from worsening beyond the level of 2001, a fact which is particularly evident in 2005, when the tax bur-

den went up by about 1 p.p. of GDP. The debt ratio stood at 64.0 per cent at the end of 2005, recording

a 5.4 p.p. increase in the course of the year.

The path of the cyclically adjusted primary current expenditure in Portugal since the mid-1990s has

been different from that of euro area countries as a whole. In fact, in Portugal this variable has in-

creased in cumulative terms by around 8.2 p.p. of GDP since 1995 and by 4.2 p.p. since 2001 (Table

2.7 and Chart 2.12), while in the euro area, on average, it showed a tendency to stabilise over the last

decade. The level of primary current expenditure as a percentage of GDP in Portugal is now close to

the euro area average, in spite of much lower per capita income in the Portuguese economy. The

buoyancy of this variable in the second half of the 1990s was chiefly associated with the behaviour of

public consumption, while, in the most recent period, its main determinant was the dynamism of trans-

fers to households in cash, particularly of pension outlays. The weight of those transfers in the house-

hold disposable income increased from 17.0 per cent in 2001 to 20.8 per cent in 2005, and this is likely

to be one of the factors behind the buoyancy of private consumption in recent years. In the euro area in

the same period, the ratio of public transfers received by households to the respective disposable in-

come changed much less, moving from around 24.5 per cent to 25.3 per cent.5

Tax revenue6

in Portugal, adjusted for the effects of the business cycle, increased by around 3.2. p.p.

of GDP since 2001, quite concentrated in taxes on production and imports. These developments con-

trast with those in the euro area, where the tax burden has been declining somewhat in the recent pe-

riod. However, the rise in that variable in Portugal is due not only to discretionary measures, but also to

a greater effectiveness of tax collection. The reduction of tax evasion is positive from the point of view

of equity, and at the same time it ensures a level-playing field among economic agents. In addition, the

widening of the tax base will eventually open in the medium term the possibility of a reduction in aver-

age tax rates, in case the necessary control of primary expenditure occurs.



41

Table 2.7

DEVELOPMENTS IN CYCLICALLY ADJUSTED PRIMARY CURRENT EXPENDITURE AND TAX REVENUE


1995 1998 2001 2005

Cyclically adjusted primary current expenditure 32.1 33.1 36.1 40.3

of which:

Expenditure included in public consumption(a)

18.4 18.8 20.6 21.7

Transfers to households in cash 11.0 11.1 12.1 14.5

of which:

Pensions 8.3 8.2 8.9 11.0

Unemployment benefits 0.6 0.6 0.7 0.9

Cyclically adjusted tax revenue(b)

32.2 32.5 32.3 35.5

Taxes on income and wealth 9.0 8.8 8.7 8.9

Taxes on production and imports 13.4 13.7 13.3 15.3

Social contributions 9.8 10.0 10.3 11.4


Notes: (a) Staff costs, intermediate consumption and transfers to households in kind. (b) Excluding imputed contributions.

(5) European Commission data.

(6) Measured as the sum of the revenue from taxes on income and wealth, taxes on production and imports and social contributions, excluding imputed

contributions.

The rise in revenue as a result of the increased tax burden has been absorbed by the sharp growth of

primary expenditure. Therefore, the containment of the latter appears to be the only way to achieve ef-

fective fiscal consolidation. The measures taken since 2002 focusing on some public consumption

components have had limited results. Although the wage freeze in 2003 and 2004 has allowed for a

temporary deceleration in compensation of employees, the constraints on the hiring of civil servants

were not sufficient to halt the increase in headcount for the general government as a whole. In fact,

since 2001 the number of general government employees recorded a cumulative change of close to

4.5 per cent,7

i.e. higher than the change in total employment in the economy and in dependent em-

ployment, which grew by 0.1 and 2.7 per cent respectively, in the same period, according to the INE’s

Labour Force Survey.

The borrowing requirements resulting from the fiscal imbalance, together with the weakness of eco-

nomic activity in the recent period, have led to a continued increase in the debt-to-GDP ratio, which

amounts to 11.1 p.p. since 2001. In Portugal developments in this indicator have been the most nega-

tive among the countries comprising the euro area, where the debt ratio rose on average by around 2.5

p.p. in the same period (Chart 2.13). Notwithstanding the significant increase in the debt stock during

the past few years, the decline in the implicit interest rate on government debt allowed interest expen-

diture to remain relatively stable. Taking into account that in the future additional gains thus obtained

will be limited, if the trend of the debt ratio is not reversed, there will be a rapid increase in interest

expenditure.

The process of financial integration of the Portuguese economy has made it possible to meet the in-

creased financing required by general government through external credit. In fact, the share of Portu-

guese government debt held by non-residents rose from 33 per cent in 1998 to 46 per cent in 2001 and

58 per cent in 2005. With the elimination of the exchange rate risk associated with participation in the

monetary union, government debt securities of euro area countries have proven to be virtually perfect

substitutes, and to date there has not been significant market discrimination on the basis of the sover-



42


CYCLICALLY ADJUSTED TAX REVENUE(a)

AND

PRIMARY CURRENT EXPENDITURE IN PORTUGAL

AND THE EURO AREA

CHANGE IN THE DEBT RATIO IN PORTUGAL AND

THE EURO AREA

30

32

34

36

38

40

42

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fG

DP

Cyclically adjusted tax revenue (Portugal)

Cyclically adjusted primary current expenditure (Portugal)

Cyclically adjusted tax revenue (euro area)

Cyclically adjusted tax revenue (euro area)


Note: (a) Excluding imputed contributions and, for Portugal, temporary measures.

-3

-2

-1

0

1

2

3

4

5

6

2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fG

DP

Change in the debt ratio (Portugal)

Change in the debt ratio (euro area)

Sources: European Commission, INE, Ministério das Finanças and Banco de Portugal.

(7) Weighted sum of the annual average change in beneficiaries of Caixa Geral de Aposentações and in employees contributing to the general social security

system, belonging to the public administration, defence and compulsory social security sector.77777777777777777777777

eign risk characteristics of securities.8

This situation weakens incentives to fiscal discipline, thereby

furthering the transfer of liabilities from present to future generations.9

The achievement of sound public finances is part of a number of macroeconomic stability conditions

deemed necessary to economic growth.10

Indeed, an unsustainable fiscal path gives rise to uncer-

tainty with regard to when and how it is going to be corrected, impacting negatively on private sector in-

vestment. Besides, fiscal discipline is instrumental in order to cope with structural trends that impact on

public accounts, such as population ageing (see “Box 2.2 The fiscal effects of population ageing”). Fi-

nally, a sound budgetary position would create room for a counter-cyclical use of fiscal policy aiming at

short-term macroeconomic stabilisation.

The need to correct the structural imbalance of public finances in Portugal, which is the highest among

euro area countries, also stems from the requirements imposed by the Treaty and the Stability and

Growth Pact. The Council declared that Portugal was in an excessive deficit situation in 2005, follow-

ing the update of the Stability Programme submitted by the Portuguese authorities in June. The latter

assumed a more realistic deficit (quite above the reference value of 3 per cent of GDP for 2005) that re-

sulted from the revision of fiscal forecasts. The Stability Programme was updated again last December

and kept the target for the budget deficit in 2008 below 3 per cent of GDP (Chart 2.14). In addition, the

Programme set the medium-term objective at -0.5 per cent of GDP. It should be recalled that in the

context the recent reform of the Stability and Growth Pact, Member States were required to set a me-

dium-term budgetary objective, defined in terms of the underlying budget balance, i.e. of the balance

adjusted for the effects of the cycle and temporary measures. This objective may vary between an un-

derlying balance of -1 per cent of GDP and balance or surplus, according to the countries’ situation in

terms of the debt ratio and potential output growth, so as to ensure a safety margin for the deficit

vis-à-vis the reference value of 3 per cent of GDP. According to the Stability and Growth Pact, the pace

of convergence to the medium-term objective for those countries that still have not achieved it should



43

Chart 2.14

OBJECTIVES FOR THE BUDGET BALANCE IN

UPDATED STABILITY AND GROWTH

PROGRAMMES AND ACTUAL BUDGET BALANCE

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

As

ap

erc

en

tag

eo

fG

DP

SGP Dec 2005

SGP Jun 2005

SGP Dec 2002

SGP Dec 2001

SGP Jan 2001

Actual budget

balance

SGP Dec 2003

SGP Dec 2004

Sources: INE and Ministério das Finanças.

(8) However, in 2005 there was some discrimination by participants in financial markets of government debt securities of euro area countries (see “Section 1 of

Chapter 2 The monetary policy of the ECB and monetary and financial conditions of the Portuguese economy”).88888888888888888888888

(9) See Detken et al. (2004), “On prosperity and posterity: The need for fiscal discipline in a monetary union”, Working Paper no. 420, December, ECB.99999999999999999999999

(10) For a recent reference, see IMF (2006), “Fiscal Adjustment for Stability and Growth”.

at least translate into an annual increase in the underlying balance of 0.5 p.p. of GDP. As already men-

tioned, in Portugal this balance declined by around 0.6 p.p. of GDP in 2005. The Council recommenda-

tions addressed to Portugal for the correction of the excessive deficit situation include an improvement

of 1.5 p.p. in the underlying balance in 2006 and of at least 0.75 p.p. in 2007 and 2008. Although the

current Stability Programme complies with these recommendations, in February 2006 the Council

stressed that reaching those fiscal targets requires full implementation of the measures announced for

2006, as well as the adoption of additional measures in 2007 and the following years, taking into

account the budgetary risks of lower than expected economic growth.

2.3. Structural Issues

In 2005 the Portuguese economy continued to show one of the slowest growth paces among ad-

vanced economies and compared to the new European Union Member States (Chart 2.15). Portugal

thus continued to move away from the average EU per capita income level. The divergence accumu-

lated since 2000 places this indicator at a level similar to that recorded in the early 1990s (Chart 2.16).

The real convergence of the Portuguese economy requires a reversal of the low productivity trend

growth seen in recent years. In fact, productivity, i.e. the quantity and quality of goods and services pro-

duced in each working hour, is, in the long run, a determinant of the level of the economy’s real wage

and per capita consumption.

Developments in labour productivity are necessarily complex, and their calculation and understanding

involves a combination of various factors.11

First, there are problems that stem from the difficulties in

measuring the quantity of productive factors and the value of some output components.12

Second, pro-



44


GDP GROWTH RATES AND GDP PER CAPITA GDP PER CAPITA IN PORTUGAL

Purchasing Power Parities

0

1

2

3

4

5

6

7

8

9

20 40 60 80 100 120 140

GDP per capita as a percentage of EU15

(corrected for purchasing power parities)

Ave

rag

eG

DP

gro

wth

rate

(20

00

-20

05

)

PT

IE

PL

LV

EE

LT

GRHUSK

CZ

KR

NZ

ES

SI

DE, IT

FR

IS

US

UK

JP

NO

CH

CAAUFI

SE

BE DK

AT

NL


50

55

60

65

70

75

80

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

EU

15

=1

00


Note: Break in series in 1991 (from 1991 onwards, it includes reunified Germany).

(11) There are also methodological issues associated with choosing between the calculation of total factor productivity and the calculation of labour productivity.

The former requires the measurement of the quantity of productive factors and the estimation of a production function to separate the contribution to growth

resulting from labour and capital accumulation from the effect of other factors, such as technical progress. In turn, labour productivity, which is a more

common measure in economic analysis texts, calculates only the quantity of output per employee or per hour worked.

(12) For example, the number of hours worked in the economy is difficult to measure and the value of the general government output is obtained indirectly, since

the goods and services it produces are not traded in the market. In fact, the contribution from general government activity to output is largely associated with

the volume of resources used, which is equivalent to assuming zero productivity growth in this sector, with an impact on developments in productivity in the

economy as a whole.

ductivity is pro-cyclical in nature, i.e. it varies similarly to output,13

making it difficult to distinguish trend

from cyclical developments. Third, empirical evidence points to high rates of entry and exit of firms in

each period, as well as heterogeneity in terms of the behaviour of entrant and incumbent companies

and sectoral heterogeneity. Therefore, the aggregate measure of labour productivity is affected by im-

portant composition effects linked to developments in the economy’s firm and sectoral structure.

The levels of productivity per hour worked in the Portuguese economy are very low compared to other

advanced economies (Chart 2.17). In 2004 productivity per hour worked, measured in US dollars and

corrected for the purchasing power parities, accounted for 55 per cent of the average level seen in the

euro area, i.e. only slightly above that recorded in some countries that have joined EU only recently. In

addition, labour productivity in Portugal has followed a decelerating trend, having reached very low

growth rates in recent years (Chart 2.18). Trend productivity growth in Portugal declined from around

2.5 per cent in the first half of the 1990s to 0.9 per cent, on average, in the 2000-2005 period. The latter

figure stands 0.4 p.p. below that seen in the euro area in the same period. In recent years the actual av-

erage productivity growth in the private sector was virtually nil in Portugal, in contrast to developments

in most advanced economies (Chart 2.19).

The reasons for the low productivity level in Portugal have been widely discussed. Nevertheless, it is

worth reflecting upon the factors that may have been associated to its weak growth in aggregate terms

in recent years. On the one hand, the unwinding of the positive effects associated with the liberalisation

of trade with EU countries, with a favourable international environment (including a period of low oil

prices) and with important structural reforms (such as the start of the privatisation process and finan-

cial liberalisation), was not offset by significant improvements linked to the endowment of productive

factors in the economy, namely with regard to the low levels of human capital14

and capital intensity. In

turn, more recently, productivity dynamics have been affected by important developments, some of

them common to the euro area and other specific to Portugal.



45


LEVEL OF PRODUCTIVITY PER HOUR WORKED,

2004

LABOUR PRODUCTIVITY IN THE PORTUGUESE

ECONOMY

Rates of change

0

40

80

120

160

Tu

rke

yM

exic

oP

ola

nd

Ko

rea

Cze

ch

Re

pu

blic

Slo

va

kR

ep

.H

un

ga

ryP

ort

ug

al

Ne

wZ

ea

lan

dG

ree

ce

Ja

pa

nIc

ela

nd

Ca

na

da

Italy

Spain

Au

str

alia

Sw

itze

rla

nd

Fin

lan

dU

nite

dK

ing

do

mA

ustr

iaS

we

de

nD

en

ma

rkG

erm

an

yU

nited

Sta

tes

Ne

the

rla

nd

sF

ran

ce

Ire

lan

dB

elg

ium

Lu

xe

mb

ou

rgN

orw

ay

Eu

roa

rea

=1

00

Source: OECD.

-4

-2

0

2

4

6

8

1977 1981 1985 1989 1993 1997 2001 2005

Pe

rce

nt

Trend productivity - Baxter & King filterTrend productivity - HP filter (lambda=100)Trend productivity - Christiano & Fitzgerald filterTrend productivity - Cobb-Douglas production functionActual productivity

Sources: INE and Banco de Portugal.

(13) The pro-cyclical behaviour of labour productivity largely results from the costs of adjusting the volume of employment to the level of activity of firms. Hence,

in periods of lower economic growth job cuts are more limited than the deceleration in activity, thereby reducing labour productivity. By contrast, in periods of

higher economic growth job creation is more limited than the acceleration in activity, thereby causing an increase in labour productivity.

(14) See “Box 2.4 Human capital as a growth factor in the long-term”, Annual Report, 2004, Banco de Portugal. 14141414141414141414141414141414141414141414

With regard to the external developments that have marked the recent economic dynamics, the in-

creased international competition as from the mid-1990s and the sharp oil price rise in recent years,

both related to the intensification of the globalisation process, should be emphasised (see “Box 1.1

The intensification of the globalisation process”). The integration into the world economy of the new EU

Member States and, more recently, of developing Asian economies, changed the pattern of national

comparative advantage. The new international environment is an opportunity to benefit from trade

gains, with positive effects on productivity and welfare, but it requires a significant reallocation of re-

sources in the economy, with transition costs. Such resource reallocation should reflect the change in

the pattern of comparative advantage, which is likely to require the presence in sectors and markets

with high demand growth potential (see “Box 2.3 Portuguese export market share: an analysis in the

major export markets”). In turn, the strong oil price rise translates into a deterioration of the oil-import-

ing countries’ terms of trade, with a particular impact on those economies that depend the most on for-

eign suppliers of energy and those with lower energy efficiency levels, such as the Portuguese

economy.15

In the current context of high oil prices, the rationalisation of energy consumption by eco-

nomic agents and the adjustment of their investment decisions in the energy area require an effective

functioning of the price system, signalling the higher relative scarcity of this type of goods.

At the domestic level, reference should be made to fiscal policy, which was characterised by unsustain-

able growth in primary current expenditure, and to the limited progress in terms of institutional reforms,

namely those aimed at promoting the adequate adjustment of labour and product markets to the new

international context and to the participation in the euro area.

The strong growth of primary current expenditure in recent years has been responsible for the emer-

gence of severe fiscal imbalances, which have originated substantial rises in the tax burden and the

government debt ratio. The high degree of uncertainty as to how fiscal problems will be solved is a dis-

incentive to productive investment by internal and external agents, which jeopardises capital accumu-

lation and long-term productivity growth. Solving the Portuguese economy’s fiscal problems becomes

particularly urgent in a context of progressive population ageing (see “Box 2.2 The fiscal effects of pop-



46

Chart 2.19

LABOUR PRODUCTIVITY IN THE PRIVATE SECTOR

Rates of change

-1

0

1

2

3

4

5

6

7

Me

xic

oL

uxe

mb

ou

rgItaly

Po

rtu

ga

lS

witze

rland

Ne

the

rla

nd

sC

an

ad

aG

erm

an

yS

pain

Austr

iaF

ran

ce

Belg

ium

Ne

wZ

ea

lan

dA

ustr

alia

Ja

pa

nD

en

ma

rkU

nite

dK

ing

do

mF

inla

nd

Sw

ed

en

No

rwa

yIr

ela

nd

United

Sta

tes

Ice

lan

dC

ze

ch

Re

pu

blic

Ko

rea

Gre

ece

Tu

rke

yP

ola

nd

Per

cent

2000-2004

1995-2000

Source: OECD.

(15) See the article by Esteves and Neves (2004), ”Oil prices and the economy", Economic Bulletin, December, Banco de Portugal.

ulation ageing”). This phenomenon, which is not a specific dynamics of the Portuguese economy, al-

ready has a pronounced impact in the short term. In a context of population ageing, developments in

labour productivity are particularly relevant. In fact, only productivity growth will make it possible to pre-

vent the expected reduction in the labour force (which results from population ageing) from

significantly affecting economic growth and developments in output per capita.

The flexible functioning of the various markets is especially important in the macroeconomic regime

arising from participation in the euro area, which is characterised by low inflation and interest rates and

easy access to international financing. The domestic propagation mechanism and the adjustment of

the Portuguese economy crucially depend on the functioning of labour and product markets, which

should guarantee the signalling role of goods prices and the mobility of productive factors. In this re-

gard, price flexibility in Portugal appears to be higher than in the euro area (see “Box 2.4 Pricing

behaviour in Portugal: microeconomic evidence”). The flexible functioning of markets contributes to in-

creasing productivity through the efficient use of available productive factors, an adequate sectoral al-

location and the incentive to adopt new productive processes. In the context of adjusting to the shocks

that have been affecting the Portuguese economy, the acceleration in productivity is essential to re-

cover the international competitiveness of the Portuguese economy.16

Recent developments in the Portuguese labour market indicate a sectoral restructuring process,

deemed necessary and urgent, but entailing adjustment costs, which tend to be aggravated by some

prevailing rigidity. This process results from both international trends and specific factors related to re-

cent developments in the Portuguese economy.

On the one hand, the ongoing sectoral restructuring is part of a long-term international trend of in-

crease in employment in the services sector and decrease in manufacturing. These developments are

associated with the higher weight of services in household consumption in a context of increase in dis-

posable income, the outsourcing of specific services formerly provided within households or firms and

the process of liberalisation and globalisation in international markets. The upward trend of employ-

ment in the services sector is also associated with lower productivity growth in this sector compared

with manufacturing, which is related to the reduced ability to incorporate technical progress, namely as

a result of the greater difficulty in mechanising certain tasks17

(Chart 2.20). In the case of the Portu-

guese economy, the strong rise in the number of general government employees is an important factor

underlying growth in employment in the services sector, in contrast to developments in most advanced

economies (see “Chapter 4 Employment and Wages”).

On the other hand, the Portuguese economy records a restructuring of employment in manufacturing

that is associated with the change in the pattern of comparative advantage (Charts 2.21 and 2.22 and

Table 2.8). Despite the heterogeneity within manufacturing, in the most recent period there was a

broadly based fall in employment, namely in those sectors that are more subject to competition from in-

ternational low-cost producers such as textiles, clothing and footwear. In the textile sector, despite the

fall in employment and GVA in the 2001-2003 period, productivity growth has been positive, which

probably reflects the closure of less competitive firms and the exit of workers with lower productivity

levels. Indeed, the restructuring process is also compatible with the development of new comparative

advantage in traditional sectors, even if these tend to lose weight. This implies the development of

firms that compete on the basis of factors other than price, with the possibility of sustaining higher



47

(16) The loss of external competitiveness of the Portuguese economy translates into the significant appreciation of the real effective exchange rate index based

on unit labour costs. However, the loss of external competitiveness is difficult to measure, since part of the developments in this exchange rate indicator can

be interpreted as accompanying its equilibrium path. For a more detailed discussion of developments in the external competitiveness of the Portuguese

economy, see “Section 3 of Chapter 2 Competitiveness and structural policies”, Annual Report, 2004, Banco de Portugal.1616161616161616161616161616161616161616

(17) The services sector shows great heterogeneity, with highly technology-intensive sub-sectors, such as financial services and telecommunications. As

regards the Portuguese economy, in recent years these sectors have made important contributions to GVA growth. Other services sub-sectors may record

important productivity gains through greater use of technology, as has been the case with the trade sector in the US economy.



48

Chart 2.20

GROWTH OF LABOUR PRODUCTIVITY IN

MANUFACTURING AND MARKET SERVICES

(1995-2003 average)

-1

1

3

5

7

9

11

-1 0 1 2 3 4

Market services

Ma

nu

factu

rin

g

PLKR

SEHU

ATJP

ISSKFI

GR

NO

CHAU

IT

ES

US

FR

LU

BE

NZ

MXDENL

CA

UK

PT

DK45º

Source: OECD.

Chart 2.21

SECTORAL DEVELOPMENTS IN THE

PORTUGUESE ECONOMY

1997-2000 average

-4

-2

0

2

4

6

8

-8 -3 2 7 12

Real GVA growth in per cent (horizontal axis)

Em

plo

ym

en

tg

row

thin

pe

rce

nt

(ve

rtic

ala

xis

)

JJ

GVA gr = 16.5%EE

II

DL

NN

LL

DC

FF

AA

BB

DB DE

DI

DD

DK

DJMM

HH

DH

DM

KK

GG

DA

DG

45º

Services

Total

Manufacturing

OO

Chart 2.22

SECTORAL DEVELOPMENTS IN THE

PORTUGUESE ECONOMY

2001-2003 average

-4

-2

0

2

4

6

8

-8 -3 2 7 12

Real GVA growth in per cent (horizontal axis)

Em

plo

ym

en

tg

row

thin

pe

rce

nt

(ve

rtic

ala

xis

)

JJ

EE employment gr = -5.2%

II

DL

NN

LL

DC

FF AA

BBDB

DE

DI

DD

DK

DJ

MMHH

DH

DM

KKGG

D

A

DG

45º

Manufacturing

Total

Services

OO

AA - Agriculture, hunting and forestry DM - Manufacture of transport equipment

BB - Fishing EE - Electricity, gas and water supply

DA - Manufacture of food products, beverages and tobacco FF - Construction

DB - Manufacture of textiles and textile products GG - Wholesale and retail trade; repair of motor vehicles,

motocycles and personal and household goods

DC - Manufacture of leather and leather products HH - Hotels and restaurants

DD - Manufacture of wood and wood products II - Transport, storage and communication

DE - Manufacture of pulp, paper and paper products; publishing

and printing

JJ - Financial intermediation

DG - Manufacture of chemicals, chemical products and man-

made fibre

KK - Real estate, renting and business activities

DH - Manufacture of rubber and plastic products LL - Public administration and defence; compulsory social

security

DI - Manufacture of other non-metallic mineral products MM - Education

DJ - Manufacture of basic metals and fabricated metal products NN - Health and social work

DK - Manufacture of machinery and equipment n. e. c. OO - Other community, social and personal service activities

DL - Manufacture of electrical and optical equipment

Source: INE.

Note: The sectors CA (mining and quarrying of energy producing materials), CB (mining and quarrying of other products), DF (manufacture of coke, refined petroleum products and nu-

clear fuel), DN (manufacturing n.e.c.) and PP (activities of households) are not included in the charts.

wage rises originated by higher productivity growth. It is also worth noting that in 2001-2003 there were

sectors within manufacturing with losses in employment and positive GVA growth, which translates

into substantial productivity gains.

In line with recent developments in the Portuguese economy, the periods of sectoral reallocation of

employment typically imply increases in the unemployment rate and a rise in the share of long-term un-

employed. This is aggravated by distortions in labour demand and supply decisions and by the depre-

ciation and inadequacy of the skills of the unemployed, a factor which is especially relevant in a

population with a low average education level. In the Portuguese case, the financial generosity of the

unemployment benefit system – one of the highest among OECD countries – is a disincentive to new

job seeking (see “Box 2.5 Work incentives and the generosity of unemployment benefits”). Likewise,

changes in the legislation governing unemployment benefits in recent years, in particular the increase

in the length of granting periods, seem to have contributed to the increase in the unemployment dura-

tion.18

The depreciation of the skills of the unemployed and the consequent difficulties of reintegration

in the labour market have been cause for concern for governments and international organisations



49

Table 2.8

EMPLOYMENT, GROSS VALUE ADDED AND SECTORAL PRODUCTIVITY

NACE Productivity

level

vis-à-vis

average

economy in

2002

Weight in

GVA in

2002

Weight in

employment

in 2002

Contribution

to average

GVA growth

in 2001-2003

period

Productivity

growth

1997-2000

Productivity

growth

2001-2003

AA Agriculture, hunting and forestry 30.4 3.0 9.8 0.0 -0.8 -0.8

DB Textiles and textile products 50.9 2.6 5.2 -0.1 1.2 1.2

DD Wood and wood products 53.4 0.7 1.2 0.0 4.5 3.8

DC Leather and leather products 54.2 0.7 1.4 0.0 -0.4 -3.8

FF Construction 64.7 7.6 11.7 -0.4 -1.9 -4.2

HH Hotels and restaurants 76.5 4.2 5.5 -0.1 0.5 -2.9

DJ Basic metals and fabricated metal

products

76.5 1.5 2.0 0.0 4.1 3.5

GG Wholesale and retail trade; repairs 81.7 13.4 16.5 -0.1 1.8 -2.5

BB Fishing 88.0 0.3 0.4 0.0 2.7 4.6

OO Other community, social and

personal service activities

88.6 2.4 2.7 0.0 1.0 -1.9

DL Electrical and optical equipment 96.4 1.0 1.1 0.0 6.8 7.7

DK Machinery and equipment n. e. c. 99.3 0.9 0.9 0.0 3.0 2.9

NN Health and social work 101.7 6.0 5.9 0.1 -0.6 -1.0

DH Rubber and plastic products 101.9 0.5 0.5 0.0 4.4 -1.0

DA Food products, beverages and

tobacco

105.6 2.5 2.3 0.0 2.2 1.1

DI Other non-metallic mineral products 110.3 1.6 1.4 0.0 3.1 0.4

MM Education 113.2 7.0 6.2 0.1 -1.0 0.2

DM Transport equipment 121.4 1.0 0.8 0.0 -2.0 1.7

LL Public administration and defence;

compulsory social security

123.2 8.9 7.2 0.2 0.9 0.9

DE Pulp, paper and paper products;

publishing and printing

147.8 1.5 1.0 0.0 2.4 -0.2

II Transport, storage and

communication

180.7 6.8 3.8 0.3 3.9 3.9

DG Chemicals, chemical products and

man-made fibre

185.2 0.9 0.5 0.0 4.1 -2.3

KK Real estate, renting and business

activities

245.5 14.1 5.8 0.0 -1.9 -1.7

JJ Financial intermediation 354.0 6.3 1.8 0.6 18.7 11.5

EE Electricity, gas and water supply 516.1 2.5 0.5 0.1 7.0 9.4

Total 0.8 0.3 1.7

Source: INE.

(18) See the article by Pereira, A. (2006), “Assessment of the changes in the Portuguese unemployment insurance system”, Economic Bulletin, Spring, Banco

de Portugal.1818181818181818181818181818181818181818

such as the OECD and the European Commission. In particular, public policies supporting training and

job seeking tend to warrant increased attention in sectoral restructuring periods such as the current

one. However, as is supposed to happen with most public policies, the support to training and job

seeking must be well-oriented and its results assessed (See “Box 2.6 Public policies supporting job

seeking and unemployment duration”).

Wage flexibility reinforces the ability of firms to adapt to shocks and contributes to accelerate the sec-

toral restructuring process, as well as to reduce its costs in terms of unemployment. In fact, wage flexi-

bility may benefit those companies that are in the course of reconverting their business and makes it

easier for workers to shift to sectors where new job opportunities emerge. In this context, the current

wage rigidity in the Portuguese labour market renders the adjustment of Portuguese economy difficult

and jeopardises productivity growth.19

However, wage flexibility does not enable to sustain those sec-

tors where the country ceased to have comparative advantage, namely in low-tech and low

value-added goods, which face the direct competition from international producers with much lower

unit labour cost levels. Finally, the behaviour of general government substantially affects the Portu-

guese labour market, especially considering the significant weight of employment in the public sector,

which rose further in 2005. Moreover, the rigidity of the working and wage practices prevailing in the

general government sector affects economy-wide employment, wages and labour mobility.20

The level of and developments in productivity are also strongly influenced by the functioning of the

product market. In this regard, the adoption of policies to promote competition stimulates growth in the

most productive firms and sectors. An adequate competitive environment is also characterised by

business mobility, measured by the easy entry into and exit from the various markets.21

In fact, suc-

cessful business creation is a trial and error process that requires mobility, allowing for productivity

growth in the economy to occur through the broadly based increase in the quality of firms in the sector,

more than through the increase in the size of the most productive firms. Some stylised facts regarding

Portuguese business demography seem to be in line with the international experience, also in terms of

their average size. However, several indicators point to high costs associated with business mobility,

and therefore the Portuguese effort of catching-up to the best international practices should be

stepped up (Charts 2.23 and 2.24). This effort should also include eliminating factors that lead some

companies to operate in the informal sector. The prevailing high degree of informality is incompatible

with a level-playing field, thus distorting the functioning of markets.

As previously referred to, it is also important to ensure a greater increase in productivity in the services

sector, which has a growing weight in the total economy. The US experience in recent years is relevant

in this context, since an important share of productivity gains is found in the services sector, namely in

the trade sector.22

In 2003 the trade and repairs sector as a whole in Portugal accounted for around 14

per cent of GVA and 16 per cent of total employment. These figures exceed those seen on average in

the euro area and, in terms of share in the productive activity, they are also higher than those seen in

the US (Chart 2.25). However, in the 2001-2003 period Portuguese labour productivity in this sector

grew weakly. In fact, similarly to other EU countries, this is one of the sectors where there is scope for

significant progress in Portugal (see “Box 2.7 Developments in the structure of the retail trade sector in

Portugal”).



50

(19) See “Box 2.5 Nominal and real wage rigidity: a microeconomic approach”, Annual Report, 2004, Banco de Portugal.1919191919191919191919191919191919191919

(20) See the articles by Centeno, M. and Pereira, M. (2005)," Wage determination in general government in Portugal", Economic Bulletin, Autumn, Banco de

Portugal; and Centeno, M. and Portugal, P., (2001), “Wages of civil servants”, Economic Bulletin, September, Banco de Portugal.2020202020202020202020202020202020202020

(21) See the article by Cabral, L. (2005), “Small firms in Portugal: A selective survey of stylized facts, economic analysis and policy implications”, Communication

presented in the III Conference on Portuguese economic development in the European area, Banco de Portugal.

(22) The differences in the sectoral structure of gross value added between the US and the EU also explain the productivity growth differential. The contribution

from productivity growth in high-technology sectors, namely semiconductors and office equipment, to average productivity growth is much higher in the US,

since these sectors account for a higher share of the productive structure in this country.

The disappointing behaviour of trend productivity in recent years is a reflection of several structural

problems, as well as a cause of the worsening of macroeconomic imbalances in the Portuguese econ-

omy. Pursuing measures that promote higher growth in trend productivity will facilitate a restructuring

of the economy that is compatible with the new international competitive framework, thus contributing

to pursue the real convergence process. If, within the scope of human capital, possible policy mea-

sures will tend to produce visible effects only in the medium to long-term, at the institutional level re-

forms that allow for the correction of the structural imbalance of public accounts and that lead to an

improved functioning of markets may have significant effects on investment and productivity at a

shorter horizon.



51


ADMINISTRATIVE REGULATION(a)

ECONOMIC REGULATION(a)

0.0

1.0

2.0

3.0

4.0

Ca

na

da

Un

ite

dK

ing

do

mA

ustr

alia

No

rwa

yD

en

ma

rkU

nited

Sta

tes

Ire

lan

dS

we

de

nF

inla

nd

Ne

wZ

ea

lan

dS

lova

kR

ep

ub

licP

ort

ug

al

Hu

ng

ary

Lu

xe

mb

ou

rgF

ran

ce

Italy

Ja

pa

nIc

ela

nd

Ko

rea

Ge

rma

ny

Belg

ium

Gre

ece

Ne

the

rla

nd

sA

ustr

iaS

pain

Me

xic

oS

witze

rla

nd

Cze

ch

rep

ub

licP

ola

nd

Tu

rke

y

Min

reg

.0

-m

ax

reg

.6

2003 1998

0.0

1.0

2.0

3.0

4.0

Au

str

alia

Ice

lan

dS

lova

kR

ep

ub

licN

ew

Ze

ala

nd

Un

ite

dS

tate

sD

en

ma

rkJa

pa

nU

nite

dK

ing

do

mC

an

ad

aIr

ela

nd

Lu

xe

mb

ou

rgA

ustr

iaK

ore

aN

eth

erl

an

ds

Sw

ed

en

Ge

rma

ny

Be

lgiu

mF

ina

lan

dC

ze

ch

rep

ub

licS

witze

rla

nd

Sp

ain

Me

xic

oT

urk

ey

Gre

ece

Po

rtu

ga

lN

orw

ay

Fra

nce

Ita

lyP

ola

nd

Hu

ng

ary

Min

reg

.0

-m

ax

reg

6

2003 1998

Source: OCDE.

Note: (a) Considers the administrative burden on specific sectors, entrepreneurs and

startup companies, licencing and authorisations, and the communications and simplicity

of existing rules

Source: OECD.

Note: (a) Considers the involvement of the state in economic activity, the existing barriers

to competition and international trade and investment.

Source: Groningen Growth and Development Centre , INE and OECD.

Note: (a) Wholesale and retail trade, except of motor vehicles and motorcycles and repair

of personal and household goods (NACE 51+52).

0

2

4

6

8

10

12

14

16

18

Portugal EU15 US

Pe

rce

nt

GVA Employment

WEIGHT OF THE TRADE SECTOR(a)

IN GVA AND

EMPLOYMENT, 2003

Chart 2.25

Main Structural Measures in 2005

In 2005 a number of structural changes that are worth mentioning took place in Portugal.

Regarding the removal of barriers to entry, reference should be made to the approval of Decree-Law

No. 134/2005 of 16 August, which allows for the sale of non-prescription medicines outside pharma-

cies, albeit without eliminating the intervention of pharmacists. This change meant the liberalisation of

the retail trade of these medicines, thereby prevailing a free price and free competition system, with

benefits in terms of efficiency and social welfare. In addition, a special licensing regime came into

force. It created a high-speed company registration service, taking a short time to register a new com-

pany and requiring the visit to only one business registration office. In order to speed up procedures,

Portugal keeps a stock of pre-approved company names from which investors can choose. Besides,

investors can also select the most suitable type of company. Within the scope of this process there

was also a reduction in the financial cost of setting up companies. Finally, the activities of the Competi-

tion Authority were intensified in 2005 as regards analysing concentration operations, monitoring regu-

lated markets, examining measures liable of corresponding to State aid and studying

competition-restrictive practices.

There were also some structural changes in general government. The most significant one concerns

the revision of the retirement statute in the public sector, which will have lasting effects on expenditure

growth in a field deemed essential to ensure the long-term sustainability of public finances. Law No

60/2005 of 29 December lays down the mechanisms for the convergence of the public sector social

protection system into the general social security scheme as regards retirement conditions and the

calculation of pensions. In fact, as from 1 January 2006, Caixa Geral de Aposentações ceased to reg-

ister beneficiaries, the retirement age is progressively increased from 60 to 65 years by six months ev-

ery year throughout a ten-year period, and the number of years of service necessary to be granted the

full pension increased from 36 to 40 years. The pension calculation will be made in accordance with

the rules of the general social security scheme as regards wages earned as from early 2006, while for

wages referring to the period of service up to that date the former rules will apply.23

Still in terms of the

containment of government expenditure growth, reference should be made to the convergence of sev-

eral public healthcare sub-systems into the regime of ADSE (Directorate-General for the Protection of

Civil Servants) and to the effort to rationalise human and material resources in the field of education,

with the closure of schools with a low number of students and a greater involvement of teachers in

teaching activities.

At the end of December 2005, the Parliament approved the new urban house renting regime (Novo

Regime do Arrendamento Urbano) with the purpose of bringing rents closer to their market value and

thus contribute to a better allocation of resources in the economy. Obstacles to the functioning of this

market lead to the deterioration of the housing stock and to the existence of vacant properties, while at

the same time more resources are channelled to the construction of new houses. The changes ap-

proved envisage that the rent value will be related to the taxable property value, calculated through the

criteria of the municipal tax on real estate, taking into account characteristics such as construction

date, size and location. Rents will be updated in a phased manner, over a five-year period. However,

the following exceptions are envisaged: if the family household of the tenant has an adjusted annual

gross income lower than five annual minimum national wages; if the tenant is 65 years old or more; if



52

(23) The retirement pension of beneficiaries registered as from 1 September 1993 was already calculated under the terms and conditions of the rules applicable

to the general social security system (Decree-Law No. 286/93 of 20 August).

the tenant has a disability with a proven degree of incapacity exceeding 60 per cent. In these situations

the updating of the rent will take place over a 10-year period. However, the updating period can be

shortened to two years, when the family household of the tenant has an adjusted annual gross income

exceeding fifteen annual minimum national wages. If the maintenance status of a property is bad, the

landlord will only be able to increase the rent after the execution of repair works.



53



54

Box 2.1. The 2005 Budgetary Outturn

The Report on the State Budget for 2005, prepared in October 2004, set the general government deficit target at

2.8 per cent of GDP,1

on a National Accounts basis. This result was crucially dependent on the implementation of

significant temporary measures, which as a whole amounted to 1.4 per cent of GDP, and was based on a very fa-

vourable macroeconomic scenario, involving 2.4 per cent real GDP growth.

The Government resulting from the February 2005 elections requested the Governor of Banco de Portugal to chair

a commission (Comissão para a Análise da Situação Orçamental – Commission for the Analysis of the Fiscal Po-

sition) set up with the purpose of assessing the foreseeable developments in the Portuguese public finances in

2005, taking into account the Budget approved at the end of 2004 and what could be reasonably expected on the

basis of the information available at that time of the year. The Commission’s report was presented at the end of May

and pointed to a deficit of 6.8 per cent of GDP,2

on the assumption that no significant temporary measures would be

implemented, given the difficulties in using those initially projected; that no additional policy measures would be

taken; and that real GDP growth would stand at 1.0 per cent. Despite changes in the macroeconomic scenario, the

Commission’s projections did not point to a significant loss in tax revenue, as it took into account a substantial ef-

fect of the improvement in tax administration effectiveness, which had not been foreseen in the 2005 State Budget.

In addition to the impact of excluding temporary measures, the new estimate of the deficit resulted mainly from the

underestimation of primary current expenditure in the 2005 State Budget – with particular emphasis on the State,

the National Health Service and the civil servants pension system (Caixa Geral de Aposentações) - at the time

estimated at 1.8 percentage points of GDP.

Table 1

GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTS)

EUR millions

2005

Memo:

2004 (exc. temp. meas.)

2005

Budget

(exc.

temp.

meas.)

Sup.

Budget

Outturn(a)

Differences 2005

Budget

Outturn(a)

Dif.

(1) (2) (3) (4)=(2)-(1) (5)=(3)-(2) (6)=(3)-(1) (7) (8) (9)=(8)-(7)

Total revenue 60 708 60 328 60 949 -380 621 242 58 926 58 131 -795

Tax revenue 51 697 52 617 53 300 920 683 1 603 49 773 50 372 599

Other revenue 9 010 7 711 7 649 -1 300 -62 -1 361 9 154 7 759 -1 394

Total expenditure 66 677 69 072 69 987 2 395 914 3 309 65 406 65 809 403

Social payments 24 505 26 068 26 451 1 562 383 1 945 23 861 24 287 426

Compensation

employees 20 282 21 232 21 329 951 97 1 047 19 957 20 512 555

Intermediate

consumption

5 130 5 709 5 629 579 -80 499 5 073 5 255 182

Subsidies 1 962 2 361 2 325 399 -35 364 2 489 2 218 -271

Interest 4 076 4 125 4 018 49 -107 -57 3 953 3 825 -128

Investment 4 373 4 614 4 387 241 -227 14 4 501 4 191 -310

Other expenditure 6 350 4 963 5 847 -1 387 884 -503 5 571 5 520 -51

Total balance -5 970 -8 744 -9 037 -2 775 -293 -3 068 -6 479 -7 678 -1 198

Sources: Report of the Commission for the Analysis of the Fiscal Position (columns 1 and 7), Report of the Supplementary Budget for 2005 (column 2) and Banco de Portugal and

Ministério das Finanças estimates (columns 3 and 8).

Notes: (a) According to the accounts compiled in the framework of the March 2006 Excessive Deficit Procedure, adjusted, for comparability reasons, to mirror the procedures previously

used in the 1995 base of the National Accounts. (b) The GDP level corresponds to the Banco de Portugal estimate in the 2000 base used in the preparation of this Annual Report.

(1) 2.7 per cent of GDP estimated according to the new base of the National Accounts (base 2000).

(2) 6.5 per cent of GDP estimated according to the new base of the National Accounts (base 2000).



55

In June 2005, following the reassessment of fiscal prospects, the Government updated the Stability and Growth

Programme (SGP), laying down the foundations for a fiscal consolidation strategy aimed at reducing the general

government deficit in Portugal to below 3 per cent of GDP by 2008. In the same month, and in order to ensure the

target set out in the SGP for 2005 would be met, the Government submitted to Parliament a Supplementary Bud-

get, which already included the impact of a set of new measures, both on the revenue and on the expenditure side.

Table 1 compares general government accounts corresponding to the 2005 State Budget, excluding the effect of

temporary measures, with the Supplementary Budget and the fiscal outcome reported within the framework of the

March 2006 Excessive Deficit Procedure. With regard to this comparison, the following points should be

highlighted:

• The tax revenue outturn was €1,603 million above the amount forecast in the 2005 State Budget and €683

million above the figure envisaged in the Supplementary Budget. Part of such differences were due to a

base effect resulting from successive revisions to the 2004 account, which affected imputed social

contributions and, to a lesser extent, taxes on income and wealth and actual social contributions. Gains

resulting from the improved effectiveness of tax administration, which were gradually revised upwards,

were one of the predominant features of the 2005 fiscal outcome and one of the main factors behind the

abovementioned figures. Finally, tax increases approved at the beginning of the second half of 2005 also

contributed significantly to the increase in tax revenue. Their impact had already been taken into account

in the preparation of the Supplementary Budget.

• Conversely, other revenue (other current revenue and capital revenue) stood €1,361 million below the

initial figures, mainly due to a base effect resulting from the revision of the 2004 account made between

the 2005 State Budget and the Supplementary Budget. This base effect largely affected other current

revenue (including sales of goods and services) and capital revenue.

• With regard to primary current expenditure, special mention should be made to the magnitude of the

difference between the fiscal outcome and the initial budget, in particular regarding social payments

(€1,945 million), compensation of employees (€1,047 million) and intermediate consumption (€499

million). In all these cases, the main underlying factor was the underestimation of current expenditure in

the 2005 State Budget, which was stressed by the Commission for the Analysis of the Fiscal Position.

Moreover, the base effect resulting from changes to the 2004 account was also relevant, mainly

associated with imputed social contributions, with an impact on both social payments and compensation

of employees.

• With regard to investment, the fiscal outcome was close to the figure foreseen in the 2005 Budget,

excluding temporary measures envisaged therein. In the Supplementary Budget, however, public

investment was revised upwards from the 2005 State Budget (€241 million), due to the inclusion of

Estradas de Portugal in general government, which was partly offset by substantial cuts in the figures

initially budgeted for this item. The fiscal outturn was nevertheless significantly below the one foreseen in

the Supplementary Budget (€227 million), largely due to the reclassification of purchases of land initially

classified as investment under net acquisition of non-financial and non-produced assets. This

reclassification also explains an important part of the downward revision of investment in 2004.

• Finally, other (current and capital) expenditure declined significantly in the Supplementary Budget (€1,387

million), which was only partly explained by the inclusion of Estradas de Portugal in the general

government sector. This prospect was only partly materialised in the fiscal outturn, which was also

affected by the reclassification of operations previously considered to be of a financial nature, such as

capital transfers, and by the abovementioned change in the recording of purchases of land from

investment to net acquisition of non-financial and non-produced assets.

In short, between the 2005 State Budget and the Supplementary Budget there was, in general, a marked upward

revision of tax revenue, due to the approval of measures aimed at increasing some taxes and to a better assess-

ment of the impact of improved effectiveness in tax administration. In addition, there was a correction of the

underbudgeting of the main items of primary current expenditure. The downward revision of other revenue and

other expenditure was of a similar magnitude and, as a whole, did not have a significant impact on the deficit. The

fiscal outturn showed an even higher tax revenue than the one foreseen in the Supplementary Budget, as well as a

more marked increase in primary current expenditure - namely social payments - and in capital transfers.



56

Box 2.2. The Fiscal Effects of Population Ageing

In the past few decades the fiscal impact of population ageing in advanced countries has been analysed in several

studies.1

This unfavourable demographic effect is expected to lead to a deterioration of the budget balance and

public debt, forcing policy-makers to adopt measures to contain growth in expenditure on pensions and healthcare.

In this context, having in mind the timely implementation of appropriate measures, it is imperative to understand the

causes and possible consequences of this phenomenon.

In the European Union the share of population aged over 65 in total population is likely to increase dramatically in

the coming decades. According to the latest demographic projections used by the Economic Policy Committee and

the European Commission2the old-age dependency ratio, i.e. the ratio of population aged over 65 to the population

aged 15 to 64 , will more than double between 2004 and 2050 in the European Union (Chart 1). Thus, while in 2004

there was, on average, one elderly person for each four working age persons, in 2050 this ratio is expected to move

to around one elderly person for each two working-age persons. The evolution projected for Portugal is even more

unfavourable than expected for European Union countries as a whole.

Population ageing stems essentially from the downward trend in fertility rates in the past few decades and from the

rise in the average life expectancy, mainly resulting from the improved living standards of the population and ad-

vances in medicine and healthcare. Chart 2 illustrates developments in these indicators in Portugal from 1960 to

2004, as well as the forecast up to 2050 considered in the 2006 projections of the Economic Policy Committee and

the European Commission.

In the coming years demographic trends associated with population ageing will bring about a strong increase in the

number of pensioners and a potentially longer average period of pension payment. It will also lead to a reduction in

the number of active employees. In the absence of structural reforms this will translate into a rather significant in-

crease in government expenditure on pensions and into a decline in contributions to public social security

schemes. If the social security scheme, as in the Portuguese case, is of the pay-as-you-go (PAYG) type, in which

Chart 1 Chart 2

PROJECTIONS FOR THE OLD-AGE DEPENDENCY

RATIO

20

25

30

35

40

45

50

55

60

2004 2010 2020 2030 2040 2050

Per

cent

PortugalEU15

EU25

Source: Economic Policy Committee and European Commission (2006).

Note: (a) Defined as the ratio of the population aged over 65 to the population aged 15 to

64.

FERTILITY RATE AND AVERAGE LIFE

EXPECTANCY AT BIRTH IN PORTUGAL

55

60

65

70

75

80

85

90

19

60

19

70

19

80

19

90

20

00

20

04

20

10

20

20

20

30

20

40

20

50

Years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Nu

mb

er

ofch

ildre

n

Fertility rate (RHS)

Average life expectancy

at birth – Men

Average life expectancy

at birth – Women

Source: Economic Policy Committee and European Commission (2006).

(1) For some more recent references, see Economic Policy Committee and European Commission (2006), “The impact of ageing on public expenditure: projections for the EU 25

Member States on pensions, health care, long-term care, education and unemployment transfers (2004-2050)”, European Economy, Special Report No 1; Holzmann, Robert and

Palmer, Edward (2006), “Issues and prospects for non-financial defined contribution (NDC) schemes”, The World Bank; OECD (2006), “Live longer, work longer”, OECD Publishing;

Group of Ten (2005), “Ageing and pension reform: implications for financial markets and economic policies”, Bank for International Settlements.

(2) Included in Economic Policy Committee and European Commission (2006).



57

contemporaneous contributions from active employees fund expenditure on pensions, the financing of the deficit

will be made through recourse to the issue of public debt, jeopardising the sustainability of public finances.

In this context, there are several reform options for defined-benefit public pension schemes of the PAYG type, such

as parametric reforms, the introduction of notional individual accounts or the creation of a multi-pillar system. In the

case of parametric reforms, the improved sustainability of the scheme is achieved by changing some key parame-

ters such as, for example, the retirement age, the formula to calculate the initial pension or contribution rates, while

its financing type remains unchanged. Notional individual accounts essentially represent the change to a de-

fined-contribution PAYG scheme, in which each person initially receives a pension equivalent to the amount that

would be obtained in a funded system, given the contributions made and an administratively set yield. Finally, a

comprehensive multi-pillar system comprises three basic elements. The first pillar would either continue to operate

as in the former defined-benefit PAYG system or could change to defined-contributions, but only up to a given level

of income. The second pillar would still be compulsory, albeit funded, applicable to wages between the previous

limit and a new ceiling to be established. The third pillar would be applied up from that income value. It may assume

different forms, but is essentially characterised by its voluntary funding nature. In the cases where notional individ-

ual accounts or a multi-pillar system were introduced, the sustainability of the system would be typically improved,

as the pension would be calculated on the basis of the actuarial value of contributions, lower than the value result-

ing from the former rules. A number of European Union countries have already transformed their defined-benefit

PAYG systems to this type of scheme. For example, Sweden currently has a public PAYG pillar in force, although

functioning under notional individual accounts, and introduced a second compulsory funded pillar in 1999.

In contrast to other types of reform, the introduction of a multi-pillar system implies a sharp reduction in contribu-

tions in the short to medium-term, while expenditure on pensions will decline more gradually, consequently wors-

ening the budget balance. In fact, according to a decision of the Eurostat of March 2004,3 defined-benefit funded

pension schemes cannot be classified within the general government sector, even if a public entity manages the

flows of contributions and pensions or if the default risk in the payment of pensions is guaranteed. However, in the

revision of the Stability and Growth Pact, the budgetary effects of the introduction of a funded social security pillar

were explicitly taken into account. With regard to the “preventive arm”, this type of reform may warrant a temporary

deviation in the convergence towards the medium-term budgetary objective. As regards the “corrective arm” within

the scope of the excessive deficit procedure, the net costs of the reform will be considered as a linear regression in

the five years following its implementation.4

The rise in the number of elderly people and their average life expectancy also has an impact on other government

accounts items, in particular expenditure on healthcare and long-term care, since this expenditure is quite concen-

trated in the last years of life. In addition, the net effect of technological innovation in the healthcare sector tends to

translate into higher spending.

The possible slowdown in economic growth due to the decline in labour supply, an effect that may be dampened by

the increase in labour productivity, is likely to lead to some loss of tax revenue, associated not only with direct

taxes, particularly in countries setting more favourable taxation on pension income than on labour income, but also

with consumption taxes. Finally, some savings in expenditure on education and possibly in unemployment benefits

may be attained, especially in countries with high structural unemployment rates, which will benefit the budget

balance.

Summing up, the fiscal impact of population ageing is strongly dependent on the institutional framework of the

country in question, particularly as regards the social security scheme, the tax structure and the importance of the

public provision of healthcare and education services vis-à-vis the private provision, as well as the structural situa-

tion of public finances. Accordingly, the set of optimal policy measures to be implemented will be country-specific.

However, it is widely acknowledged that a timely response by the authorities is unavoidable in order to minimise the

negative budgetary effects of population ageing.

(3) See Eurostat News Release No 30/2004 of 2 March 2004.

(4) In accordance with the new Code of Conduct, 100, 80, 60, 40 and 20 per cent of the net costs of the introduction of a funded pillar will be taken into account in the years following its

implementation. The net costs will be measured as the direct impact of the reform on the general government deficit. For previous reforms, 2005 will be considered the first year of

implementation.



58

Box 2.3. Portuguese Export Market Share: An Analysis in the Main Export Markets1

Developments in the market share can be expressed as an aggregation of the behaviour of exports in the various

markets of destination, which makes it possible to assess whether the loss of share over the past few years re-

sulted from an overall deterioration in external competitiveness, or if, on the contrary, it was decisively influenced

by particularly unfavourable developments in certain specific markets.

Considering a sample of nominal manufacturing exports to the eight main countries of destination of 12 important

exported products (corresponding to 70 per cent of total manufacturing exports), the Portuguese market share re-

corded a cumulative decline of 16.2 per cent between 2000 and 2005, which was particularly expressive in the past

two years (Table 1). In 2005 this indicator, based on data from the World Trade Atlas, declined by around 10 per

cent. Taking into consideration a more comprehensive sample, used in “Chapter 3 Output, Expenditure and Exter-

nal Accounts”, the loss of market share in nominal exports of goods was less sharp (6.2 per cent in 2005), which

suggests gains of share in markets with low weight in Portuguese exports.

The decline of the Portuguese export market share was broadly based in geographical terms since 1999. Through-

out this period, Portuguese exports gained market share only in the US market and (mainly) in the Spanish market.

However, in the last two years there was also a loss of share in these two markets. By contrast, the most impressive

market share losses took place in the German market (cumulative decline of 45 per cent), to such an extent that,

from being the main market of destination of Portuguese manufacturing exports in the late 1990s, the German mar-

ket is currently less important than the Spanish or French ones.

Considering a breakdown by product, market share losses were less widespread, with a special negative contribu-

tion coming from the so-called traditional sectors (textiles, clothing and footwear), but also from exports of electrical

machinery and, especially in the most recent years, from exports of vehicles. Metal products, non-electrical ma-

Table 1

MARKET SHARE OF PORTUGUESE MANUFACTURING EXPORTS

In nominal terms

Weight in

exports

Share in

level

Percentage rates of change

2004 1999-2005 2000 2001 2002 2003 2004 2005

Sample total - 0.8 -10.4 6.7 3.6 1.7 -7.3 -10.2

Spain 23.8 3.7 -3.7 1.3 8.5 10.7 -5.6 1.1

France 14.8 1.4 -13.4 4.1 9.6 -2.3 2.1 -6.4

Germany 14.7 1.2 -13.3 9.0 -0.3 -22.6 -14.4 -13.0

United Kingdom 9.7 1.0 -12.5 1.6 2.8 2.8 -13.9 -19.4

US 6.6 0.1 2.6 9.8 10.5 9.2 -8.7 -10.9

Belgium 4.2 0.8 21.3 -14.0 -22.2 -4.4 -12.3 -9.5

Italy 4.0 0.6 -10.7 18.4 6.8 -5.2 -19.9 -9.3

Netherlands 3.3 0.5 -11.5 7.8 -1.0 -4.1 -9.3 -29.5

Textiles and clothing 17.2 2.1 -13.6 3.1 0.7 -3.1 -6.5 -15.3

Vehicles 16.1 0.9 -8.8 18.8 1.2 -8.2 -4.1 -6.9

Electrical machinery 12.4 0.7 -18.2 0.2 9.6 1.9 -19.5 -17.4

Non-electrical machinery 9.1 0.3 -5.7 23.1 12.9 17.5 -0.1 -4.7

Metal products 6.1 0.6 2.9 2.6 7.6 13.1 1.3 3.3

Footwear 5.3 3.8 -13.5 1.2 -6.2 -3.2 -6.3 -17.8

Paper and wood 4.6 1.2 10.0 -6.3 13.8 10.2 -12.7 10.1

Plastics 3.8 0.7 2.5 1.4 11.2 14.2 9.6 0.5

Chemicals 3.4 0.4 6.1 -18.5 12.0 18.4 4.8 -14.0

Furniture 3.4 0.8 -9.5 17.5 1.5 40.5 11.4 -13.8

Cork 3.3 70.2 -1.3 -0.8 4.8 2.3 -2.5 -1.6

Pharmaceuticals 1.1 0.2 5.3 -13.5 -28.6 -4.6 -1.2 -3.1

Sources: World Trade Atlas and calculations in Cabral and Esteves (2006).

(1) For further details, see Cabral and Esteves (2006), “Portuguese export market shares: an analysis by selected geographical and product markets”, Economic Bulletin, Summer,

Banco de Portugal .



59

chinery, plastics and furniture sectors recorded the highest market share gains throughout the 2000-2005 period.

Considering only the past two years, plastics and metal products were the only sectors among the 12 classes con-

sidered where Portuguese exports recorded a gain of share. Hence, the loss in the Portuguese export share was

relatively widespread across the various individual markets under analysis, suggesting a significant deterioration

of the external competitiveness vis-à-vis the major competitors during the recent years.

An important aspect in the analysis of the export market share relates to the fact that its evolution is influenced by

the pattern of specialisation of each economy, because a given country benefits from a higher specialisation in

more dynamic markets, i.e. those that denote higher growth than world trade on average. Only after discounting

this structure effect will developments in the market share reflect the competitiveness revealed in each individual

export market. Chart 1 presents this breakdown, showing the contribution of effects related to the product and

geographical specialisation of Portuguese exports.

These results show, first of all, that the productive specialisation pattern gave a negative contribution to the overall

developments in the Portuguese export market share, especially over the past two years (contribution of 3.3 p.p. to

the cumulative share loss of 16.8 per cent in 2004 and 2005).2

The interpretation of this result is illustrated in Chart

2, which shows that the sectors where Portugal presents a higher specialisation - in particular the so-called tradi-

tional sectors (textiles, clothing and footwear) and, albeit to a lesser extent, paper and wood and vehicles - have

been growing below average.

The geographical structure effect, in turn, was significantly positive in the sample under consideration (with a 5.4

p.p. contribution), thus avoiding a greater decline in Portuguese export market share between 2000 and 2005. De-

velopments in the export market share benefited from high demand growth in Spain, the market where Portugal

shows a higher specialisation (Chart 2).3

These results point to a particular sensitivity of the Portuguese economy

to cyclical fluctuations in the Spanish economy. However, the results in Chart 1 should be qualified, given that they

are conditional on the selected sample, and thus should not be directly extrapolated to total Portuguese exports. In

fact, in broad terms, the high specialisation of Portuguese exports in the EU15 markets has not been comple-

mented by taking advantage of the impetus associated with higher growth in emerging markets, in particular in a

number of Asian and Central and Eastern European countries.

Chart 1

BREAKDOWN OF IN THE TOTAL CHANGE OF

MARKET SHARE OF PORTUGUESE

MANUFACTURING EXPORTS

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005

Inperc

enta

ge

poin

ts

Geographical structure effect Product structure effect

Market share effect Total


(2) This result is consistent with those presented in Cabral (2004), “Recent evolution of Portuguese export market shares in the European Union, Economic Bulletin, December, Banco

de Portugal.

(3) The Portuguese export share in Spanish imports exceeds 3 per cent, compared with an average value of 0.8 per cent for the total sample.



60

In the individual markets where Portuguese exports recorded the greatest losses of share, the highest gains were

obtained by some emerging market economies of Asia and Central and Eastern Europe. In these markets, in addi-

tion to Portugal, the highest share losses were recorded, in general, by advanced economies (Table 2).4

These de-

velopments reflect the increase in worldwide competition associated with the growing integration of new countries

into world trade, which seems to have led to a decrease in the export market share of most developed countries.

Chart 3 shows the four countries that had a higher gain of share in the same individual markets where Portuguese

exports recorded the highest share losses. Competition from Central and Eastern European countries tends to be

relatively more intense in vehicle sectors, where the presence of developing Asian economies is still not very sig-

nificant. In the remaining three products, China is always the main gainer in all geographical markets considered

during this period.

Chart 2

GROWTH OF DESTINATION MARKETS AND PORTUGUESE EXPORT MARKET SHARE (2000-2005)

Product market(a)

Chemicals

PharmaceuticalsPlastics

Paper and wood

Textiles and

clothing

Footwear

Metal products

Non-electrical

machinery

Electrical

machinery

Vehicles Furniture

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 5 10 15 20 25

Annual average growth of the destination markets

Po

rtu

gu

ese

ave

rag

ee

xp

ort

ma

rke

tsh

are

Geographical markets

Germany

Italy

Spain

France

US Netherlands

Belgium

United

Kingdom

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2 4 6 8 10

Annual average growth of the destination markets

Po

rtu

gu

ese

ave

rag

ee

xp

ort

ma

rke

tsh

are


Note: (a) Excluding cork, a sector where Portugal has an exceptionally high market share, but that also recorded lower than average growth.

Table 2

MARKET SHARE IN THE 20 MARKETS WHERE PORTUGUESE EXPORTS RECORDED THE HIGHEST LOSSES

Change between 1999 e 2005

In percentage points

Countries with higher gains in the same markets Countries with higher losses in the same markets

China 7.5 Italy -1.8

Turkey 1.3 US -1.6

Belgium 1.0 United Kingdom -1.3

Romania 0.7 Japan -1.2

Vietnam 0.6 Germany -1.1

Netherlands 0.5 Hong-Kong -1.0

India 0.5 France -0.9

Bangladesh 0.4 Spain -0.5

Poland 0.3 Indonesia -0.4

Czech Republic 0.3 Thailand -0.4


(4) For further information on the markets where Portugal recorded the highest market share losses, see Cabral and Esteves (2006). In the 10 markets where share losses were more

severe, four are of the footwear sector (United Kingdom, France, Germany and the Netherlands), four of the textiles and clothing sector (France, Spain, United Kingdom and

Germany), with the remaining two corresponding to exports of electrical machinery and vehicles to the German market.



61

However, in addition to these developments, there is evidence that the specialisation of Portuguese exports is rela-

tively similar to that of these new players in international trade. According to Table 3, developing economies show a

greater similarity to the specialisation revealed by the Portuguese economy, while the remaining advanced econo-

mies tend to present a different specialisation.5

These results suggest that Portugal may be especially affected by

the growing participation of these economies in international trade, which makes the current process of

globalisation a particularly relevant challenge to the Portuguese economy.

Chart 3

PORTUGUESE EXPORT MARKET SHARE LOSSES (2000-2005)

Footwear

-10

-5

0

5

10

15

20

United Kingdom France Germany

Inp

erc

en

tag

ep

oin

ts

Ch

ina

Ne

the

rla

nd

sR

om

an

ia

Portugal

Portugal Portugal

Ch

ina

Ne

the

rla

nd

s

Ro

ma

nia

Índia

Vie

tna

m

Ch

ina

Vie

tna

m

Ro

ma

nia

Ne

the

rla

nd

s

Textiles and clothing

-4

-2

0

2

4

6

8

10

12

France Spain United Kingdom

Inperc

enta

ge

poin

tsPortugal Portugal Portugal

Ch

ina

Ro

ma

nia

Ba

ng

lad

esh

Ma

rocco

Ba

ng

lad

esh

Tu

rke

y

Ind

ia

Ch

ina

Ch

ina

Tu

rke

y

Tu

rke

y

Ind

ia

Electrical machinery

-4

-2

0

2

4

6

8

10

12

Germany Belgium United Kingdom

Inperc

enta

ge

poin

ts

Portugal PortugalPortugal

Po

lan

dSo

uth

Ko

rea

Hu

ng

ary

Sp

ain

Hu

ng

ary

So

uth

Ko

rea

Ch

ina

Ch

ina

Ch

ina

Ne

the

rla

nd

s

Ne

the

rla

nd

s

Ne

the

rla

nd

s

Vehicles

-4

-2

0

2

4

6

8

10

12

Germany Italy Bélgica

Inperc

enta

ge

poin

ts

Portugal

Portugal Portugal

Po

lan

d

Un

ite

dK

ing

do

m

Slo

va

kia

Be

lgiu

m

Be

lgiu

m

Fra

nce

Tu

rke

y

Ja

pa

n

Tu

rke

y

Cze

ch

Re

pu

blic

Po

lan

d

Cze

ch

Re

pu

blic


(5) This result is decisively influenced by the product specialisation of the various countries. In a different context, the same type of conclusion was reached in Esteves and Reis (2005),

“Measuring export competitiveness: a view on the Portuguese effective exchange rate weights”, Economic Bulletin, Winter, Banco de Portugal . In this study, Italy also appears as

the advanced economy with a product specialisation more similar to that of Portugal.



62

Table 3

CORRELATION WITH PORTUGUESE EXPORT MARKET SHARES IN THE 96 SELECTED MARKETS

Correlation coefficients, based on average values (1999-2005)

Highest correlation coefficients Lowest correlation coefficients

Italy 0.69 Germany -0.18

Vietnam 0.52 Mexico -0.19

Morocco 0.51 Australia -0.19

India 0.42 Israel -0.20

Indonesia 0.37 Singapore -0.21

Pakistan 0.22 Ireland -0.25

Bangladesh 0.21 United Kingdom -0.28

Thailand 0.20 Japan -0.28

Tunisia 0.19 Switzerland -0.28

Turkey 0.16 US -0.31




63

Box 2.4. Pricing Behaviour in Portugal: Microeconomic Evidence

This box presents the main results on the pricing mechanism in Portugal, obtained within the scope of Banco de

Portugal’s participation in the Inflation Persistence Network.1

Quantitative evidence that results from exploring the

disaggregated databases used to construct consumer and producer price indices allowed to extract several styl-

ised facts on the behaviour of prices in Portugal.2

The main results obtained are the following:

• Almost 1 out of 4 prices is changed every month. The changing frequency for most of the prices analysed

is 0.22 for consumer prices and 0.23 for producer prices. Despite this high frequency, around half the

items analysed keep their price for at least 8.5 months for consumer prices and for at least 12 months in

the case of producer prices. In general, results point to a greater price flexibility in Portugal than in the euro

area as a whole;

• As regards consumer prices, the frequency of changes in food prices, especially unprocessed items, is

considerably higher than that of the remaining goods (Table 1). This result may reflect supply factors such

as the seasonality of some of the items belonging to this category. On the opposite side are services,

whose prices are changed, on average, every 10 months. The low frequency of changes in services prices

is also shown in qualitative surveys and may result from the higher labour share in GDP in this sector.3

• The frequencies of price changes are also heterogeneous at the producer price level: on the one side

there is the energy sector, where prices are changed on an almost monthly basis; and on the other is the

intermediate goods sector, where only one out of nine prices changes per month.

• At both the consumer price and the producer price level, increases in prices are more frequent than

decreases, although the former account for only 60 per cent of total price changes. However, the

magnitude of increases in prices is similar to that of the decreases. Hence, inflation observed at the

aggregate level is the result of a higher frequency of price increases rather than magnitude differences

between price increases and decreases.

Qualitative data from the survey conducted with a sample of Portuguese firms allowed to complement the analysis

of the frequencies of price changes.4

In particular, it made it possible to examine some aspects of the price setting

process that are not liable of being analysed on the basis of the abovementioned quantitative data. These are, for

example, the data used by firms when reviewing their prices, the reasons that lead firms to change their prices in-

Table 1

MONTHLY FREQUENCY OF CHANGES IN CONSUMER PRICES

As a percentage; based on data for a restricted group of 50 items

Total Unprocessed

food

Processed

food

Non-energy

industrial goods

Energy industrial

goods

Services

Portugal 21.1 55.3 24.5 14.3 15.9 13.6

Euro area 15.1 28.3 13.7 9.2 78 5.6

Sources: i) Dias et al. (2004); Dhyne, E., L. Álvarez, L., Le Bihan, H., Veronese, G., Dias, D., Hoffman, J., Jonker, N., Lünnemann, Rumler, F. and J. Vilmunen, (2005). “Price setting in the

euro area: some stylised facts from individual consumer price data”, Working Paper no. 524, ECB ; ii) Fabiani, S., Druant, M., Hernando, I., Kwapil, C., Landau, B., Loupias, C., Martins, F.,

Mathä, T., Sabbatini, R. e A. Stokman, 2005, “The pricing behaviour of firms in the Euro Area: new survey evidence”, Working Paper, no.10, Banco de Portugal; iii) Martins, F., 2005, “The

price setting behaviour of Portuguese firms: evidence from survey data”, Working Paper, no. 4, Banco de Portugal.

(1) With the purpose of deepening the knowledge on euro area pricing mechanisms, in January 2003 the European Central Bank and the Eurosystem’s national central banks created a

research network called Inflation Persistence Network (IPN). Among other fields, the IPN incorporated the microeconomic analysis of quantitative data, by resorting to the

disaggregated databases used by the different statistical institutes to construct their price indices. It also studied qualitative data obtained through surveys conducted with

enterprises. The Summer 2005 Economic Bulletin published a set of articles that summarise a substantial part of Banco de Portugal ’s contribution to the IPN.

(2) For a detailed description of the databases used and the methodology adopted, see Dias, M., Dias, D. and P. D. Neves, (2004). “Stylised features of price setting behaviour in

Portugal: 1992-2001”, Working Paper, No. 5, Banco de Portugal .

(3) The greater rigidity seen in services prices is one of the most robust results found not only for Portugal but for most countries participating in the IPN. There is evidence that a higher

share of labour input (labour share) is associated with lower frequencies of price changes (see, for example, Alvarez, L., Burriel, P. and I. Hernando, (2005). “Price setting behaviour

in Spain: evidence from micro PPI data”, Working Paper No. 552, ECB).

(4) From the 1370 enterprises surveyed, around 85% belong to manufacturing, while the remaining operate in the services sector .



64

frequently, or the average speed of price reaction to significant changes in costs or demand. The main results

found are as follows:5

• Under normal circumstances, more than half of the firms reviews prices on the basis of time-dependent

rules, i.e. prices are reviewed on very specific dates regardless of the prevailing economic conditions

(Table 2). This type of approach by firms comes as an alternative to the so-called state-dependent rules,

under which there is no regularity in price reviewing dates, these only occurring when economic conditions

so justify. In the presence of shocks, time-dependent rules generally induce greater price rigidity. Survey

results also revealed that in the presence of rather significant shifts in economic conditions, around 35 per

cent of the firms that usually adjust their prices on a regular basis start to adopt state-dependent rules, a

result which is consistent with that obtained for the euro area as a whole.

• An important share of the firms reviews prices on the basis of a wide series of data, which includes

expectations on future developments in variables relevant to profit maximisation, such as developments in

demand, costs and the price of the main competitors. However, most of them takes their pricing decisions

without considering the expected economic environment, and around one fourth chooses a simple

indexation rule, based for example on the current inflation rate or wage growth. This type of information is

particularly important, given that any deviations from an optimising behaviour of firms may be an additional

source of price rigidity.

• Qualitative evidence shows that prices seem to respond faster to cost shocks, in particular when these are

move upwards, than to demand shocks. The share of firms that does not change prices during the first six

months following a shock is considerable, lying between 38 per cent for a shock that implies an increase in

costs and 55 per cent for a shock that translates into an increase in demand. Results also suggest that the

speed of reaction of prices in manufacturing is significantly higher than that in services.

The existence of “implicit contracts” between firms and their costumers, where there is a tacit commitment to pre-

serve price stability as a way to ensure a lasting predictable relationship, is the main reason why firms do not imme-

diately adjust their prices in the wake of significant changes in costs or demand. Survey results showed yet other

important motivations, such as the existence of co-ordination failures related to the fear that firms have to change

their prices unless their competitors do so, the constraint imposed by high fixed costs, or the existence of explicit

(written) contracts whose renegotiation may turn out to be expensive.

Table 2

QUALITATIVE EVIDENCE ON PRICE REVIEWS

As a percentage of total firms

Price review rules Portugal Euro area Information used Portugal Euro area

Time-dependent rules, of which: 54.6 80 All information, including expectations 42.3 48

Strictly 35.4 34 Current and past information 33.1 34

In the absence of significant shocks 19.2 46 Rule-of-thumb 24.6 -

State-dependent rules 45.4 20

Sources: For Portugal: Martins, F. (2005); for the euro area: Fabiani et al. (2005).

(5) All the results obtained, as well as a description of methodological issues underlying the construction of the survey , can be found in Martins, F. (2005).



65

Box 2.5. Work Incentives and the Generosity of Unemployment Benefits

The OECD has compiled international evidence on the potential effects of tax, social benefits and unemployment

systems on work incentives. Some of the features of such systems have unintended effects not only on incentives

to move from unemployment to employment, but also from employment to unemployment. This box follows this line

of research, focusing on the unemployment benefit system in Portugal.

Public unemployment benefit systems, which provide replacement income in adverse labour market outcomes,

may be seen as a form of insurance valued by individuals according to their preferences in terms of smoothing con-

sumption throughout their lives. This type of insurance is typically not provided by the private market, mainly for

reasons of adverse selection,1

wherefore this market failure partly accounts for the existence of public unemploy-

ment benefit systems. However, the size of the public system shall take into account the level of consumption

smoothing guaranteed by individual types of insurance (e.g. savings accumulated during employment periods,

loans, income earned by other family members). Indeed, the introduction or expansion of a public system leads in-

evitably to substitution effects in private types of insurance, which should be taken into account when determining

the generosity of the system. Finally, the optimal choice regarding the generosity of the system shall also consider

that the public system gives rise to moral hazard,2

implying costs such as the decline in job seeking.

One way of assessing the financial generosity of unemployment benefit systems is to compare the income of em-

ployed individuals with that of unemployed individuals receiving unemployment benefits. For that purpose, the liter-

ature suggests the calculation of net replacement rates as the ratio of the net replacement income for the

unemployed to the net labour income. In this context, net replacement rates close to 1 act as disincentive to work.

The OECD’s publication “Benefits and Wages”3

compares the net replacement rates of member countries for a typ-

ified range of households. For instance, for a childless couple, where one of the members earns 100 per cent of the

average national income4

and the other member earns 23 of that average, net replacement rates ranged between

44 and 89 per cent in 2002, in the event of loss of the highest income. The average of the countries considered

stood at 73.3 per cent. In this regard, Portugal has a rate of 88 per cent, standing at the top of the list of countries

with the highest work disincentive levels, following Luxembourg and Sweden, with 89 per cent. The discrepancies

between Portugal and countries with lower rates are mainly due to the difference in the tax treatment given to the

replacement income. In Portugal, this income is exempt from income tax and social security contributions, while in

most countries, at the most, these rates are reduced.5

For other types of households, e.g. a couple with two chil-

dren, where only one of the members works and earns the average national income, Portugal ranks 7, with a 77 per

cent net replacement rate, immediately following Germany and the Netherlands, with 78 per cent, but above the

OECD average of 67.1 per cent.

The OECD’s paper illustrates the problem and sets it within an international context, albeit only taking into account

the effects on average income. In fact, the progressive nature and the set of tax exemptions cause distortions lead-

ing to highly heterogeneous net replacement rates along the income distribution. For Portugal, this box presents

the net replacement rates for monthly gross wages in the range between €357 (i.e. the minimum wage in 2003) and

8 times that figure, using the tables for tax withheld at the source and other regulations in force in 2003. For the

(1) “Adverse selection” arises from a problem of asymmetric information. When individuals are better aware of their own risk level than the insurance company, only those with a higher

risk choose to purchase the insurance. In fact, given that the premium is set according to the average risk, purchasing the insurance would not be optimal for individuals with a lower

risk. This type of situation necessarily leads to financial losses for the insurance company.

(2) “Moral hazard” means that individuals covered by insurance tend to adopt riskier behaviours, resulting in losses for the insurance companies.

(3) 2004 issue, OECD.

(4) Namely the average production worker wage. For more detailed information on this matter, see the OECD publication “Taxing Wages: 2001-2002”.

(5) Calculations include other country-specific benefits, such as housing benefits.



66

sake of simplicity, a couple with two children (aged 4 and 6) is analysed, where only one of the household members

works and is, therefore, the only one entitled to unemployment benefits.6

Chart 1 reflects the idea of a fairly generous system in its financial component, particularly for lower labour income.7

The Chart also highlights the heterogeneity of the system, resulting in the following situations:

• Net replacement rates generally above 80 per cent for gross income between the minimum wage and

approximately 5 times that figure.

• For the income range between €450 and €1,500, the unemployment support system is regressive, which

is contrary to the progressive nature of the tax system.

• For gross income above €1,650 the unemployment benefits are limited to 3 minimum wages, which means

that net replacement rates gradually fall from that level upwards.

The calculations do not include commuting expenses to and from work, nor other expenditure typically associated

with work, such as the need to outsource family support to minors or elderly people formerly given by a family mem-

ber. In Portugal this may represent a more active constraint than in other countries with wide public service net-

works. Therefore, net replacement rates underestimate work disincentives, given that they would increase if

including these additional costs.

The characterisation of work incentives in Portugal suggests that it is necessary to adjust some passive labour

market policies, by reforming the unemployment support system or the tax treatment of labour income. Interna-

tional experience in this regard provides a useful reference on how to adapt tax and contributory regulations to pro-

mote work incentives. During the unemployment period, it would be possible to bring taxes and social security

contributions closer between unemployed and employed individuals, hereby reducing net replacement rates. If

Chart 1

NET REPLACEMENT RATES FOR A COUPLE WITH

2 CHILDREN

(one employed family member, one member entitled to

unemployment benefits)

40

50

60

70

80

90

100

357 857 1357 1857 2357 2857

Gross income in EUR

Per

cent

Source: Banco de Portugal’s calculations.

(6) This analysis also covers the case of both family members working and losing their income. Moreover, two other cases analysed, namely, a single individual and a divorced individual

with children, present very similar results.

(7) With regard to the duration of unemployment benefits, the Portuguese system has become increasingly generous. See Pereira, A. (2006). “Assessment of the changes in the

Portuguese unemployment insurance system”, Economic Bulletin, Spring, Banco de Portugal.



67

opting to promote employment periods, it would be possible to introduce negative tax rates on very low labour in-

come, which in practice act as a complement to income under the form of tax benefits for labour, therefore creating

an incentive for individuals to move from (subsidised) unemployment to employment. This solution is known as

earned income tax credit (EITC) and has been adopted with positive results namely in the United States and the

United Kingdom.8

(8) See, for instance, Hotz, V.J.and Scholz, J.K., (2003). “The Earned income tax credit.”, in Moffitt, R.A., ed., “Means-tested transfer programs in the united states” (Chicago: The

University of Chicago Press). Meyer, B.D. and Rosenbaum, D.T., (2001). “Welfare, the earned income tax credit, and the labor supply of single mothers.” Quarterly Journal of

Economics 116(3),1063-2014. Blundell, R., Duncan, A., McCrae, J. and Meghir, C., (1999) “Evaluating in-work benefit reform: the working families tax credit in the U.K.”, JCPR

Working Paper 160.



68

Box 2.6. Public Policies Supporting Job Seeking and Unemployment Duration

In the late 1990s, following the guidelines of the European Employment Strategy, the National Plan for Employment

introduced in Portugal a wide range of programmes intended to support job search. Specifically, the INSERJOVEM

programme was created for youth below 25 years of age who have been unemployed for less than 6 months, and

the REAGE programme was introduced for adults with 25 years of age and over who have been unemployed for

less than 1 year. In a nutshell, the programmes included job-search intensive initiatives with the target-population

and the participation in short training courses, with levels of intensity depending on the characteristics of the unem-

ployed. These supporting initiatives were aimed at promoting and accelerating the transition from unemployment

to employment. This box evaluates the impact of these programmes on unemployment duration, the direct

measure of the success of such policies.

The Strategy of Causality Identification

The main task when identifying a causality relationship between a public policy initiative and its results is to isolate

every element that may have affected the behaviour of the variable used to measure such success. In the present

case, it is only natural that variables other than the public programmes have influenced unemployment duration,

e.g. the strong economic growth observed in the late 1990s. It is, therefore, necessary to use an identification/isola-

tion strategy to pinpoint the programme effects. The idea underlying the strategy followed is that of counterfactual

construction: what would have happened to unemployment duration if the participants in the programmes had not

participated therein?

In order to overcome the fact that the counterfactual is not observed, two groups of individuals, as similar as possi-

ble, were created, one of which was subject to the programme, while the other was not.1

The former is known as

“treatment group" and the latter as “control group". The implementation of the INSERJOVEM and REAGE

programmes proceeded gradually from June 1998 to January 2001 in the national territory. Among the total num-

ber of individuals eligible for the programmes, some did participate because they were already in an implementa-

tion area, whereas other individuals were not targeted by the new policies because they were located in regions

where these policies were not implemented in that period. This type of partial and sequential implementation of the

programmes, from the point of view of the evaluation, is the “second-best world” because it permits the recreation

of an almost experimental environment. In other words, the treatment of similar individuals fulfilling the same eligi-

bility conditions was different on account of merely geographical reasons, avoiding a specific selection of the par-

ticipants, which would bias the results (of the evaluation) of the programme. Therefore, the first estimate of the

programme effect consists in the difference between the unemployment durations of these two groups in the

post-programme period.

Although no substantial differences are expected in the characteristics observed in these two groups, an additional

control level may be used. Thus, at a second stage, instead of comparing the two groups only at one moment in

time, the comparison is made at two moments: before and after the programme. Should there be any differences

between the groups, and assuming that these remain constant over time, the difference previously observed may

be deducted from the difference observed after the programme, thereby identifying the share imputable to the

programme (the only distinct source of variation between the two groups). For instance, the composition of the indi-

viduals in a control group based on the inland regions is naturally different from the composition of a group based

on the coastal regions. Nonetheless, should the differences in the composition of the individuals in the two groups

in 1998 be similar to those in 1997, which is a rather plausible hypothesis, one may deduct the differences ob-

served before the programme (in 1997) from the differences in job duration observed in 1998. The remainder is

identified as the effect of the programme.2

(1) Similar means equivalent in terms of educational, regional, sectoral, gender and other observable variables. In a random selection for participation in the programmes, the appraiser

can also obtain equilibrium in non-observable variables, such as the job-seeking ef fort.

(2) In literature, this procedure is known as the “difference of the differences”.



69

Results

The evaluation presented in this box is based on data collected by the IEFP (the Portuguese employment agency)

and contains more than 2 million registrations for approximately 1.5 million individuals in the period from January

1997 to January 2001. Therefore, it covers a period prior to the implementation of the programme, from January

1997 to May 1998, and the remaining period coincides with the implementation of the measures. Table 1 presents

summary-statistics for some social and economic characteristics of the treatment and control groups. Notice the

similarities in the average values of the characteristics of both groups. The inferior part of the table highlights the

predominance of exits / removals as a result of cancelled registrations vis-à-vis transitions into employment (these

are only approximately 21 per cent of total transitions).

Table 2 presents the results of the evaluation. In fact, for individuals participating in the programmes, it reports the

average impact on unemployment duration, i.e., the widening or narrowing of the unemployment period that partici-

pating individuals have experienced, compared to a situation in which they had not participated in the programmes.

Table 1

SUMMARY STATISTICS OF THE CHARACTERISTICS OF REGISTERED INDIVIDUALS, BY ANALYSIS GROUP

Group

Treatment Control

Variable Average Standard

deviation

Average Standard

deviation

Age (in years) 31.9 12.8 33.4 13.2

Ratio of men 0.37 0.48 0.41 0.49

Ratio of beneficiaries of unemployment subsidies 0.23 0.42 0.28 0.45

Marital status (pro rata)

Married 0.48 0.50 0.49 0.50

Single 0.47 0.50 0.47 0.50

Other 0.05 0.21 0.05 0.22

Schooling (pro rata)

4 years 0.28 0.45 0.28 0.45

6 years 0.24 0.43 0.22 0.42

9 years 0.17 0.38 0.17 0.38

11 years 0.09 0.29 0.10 0.30

12 years 0.10 0.30 0.10 0.30

BA 0.03 0.16 0.03 0.16

Graduation 0.03 0.16 0.04 0.21

Master degree 0.00 0.01 0.00 0.01

Ph D 0.00 0.00 0.00 0.00

Illiterate 0.07 0.25 0.06 0.25

Reason for registration

Student 0.11 0.32 0.10 0.30

Finished studies 0.06 0.24 0.05 0.22

Finished vocational training 0.01 0.10 0.00 0.07

Used to work at home 0.01 0.12 0.01 0.12

Dismissed 0.20 0.40 0.26 0.44

Quitted 0.03 0.18 0.04 0.18

Termination of contract by mutual agreement 0.02 0.13 0.03 0.16

End of temporary job 0.34 0.47 0.29 0.46

Other 0.22 0.42 0.21 0.41

Memo:

Number of observations per situation of destination(a)

Placed through the Employment Centers or by own means 12 398 41 026

Cancelled registrations 37176 146 684

Total 53 400 201 113

Sources: IEFP and Banco de Portugal calculations.

Note: (a) The numbers reported herein relate only to individuals that could be identified as statistical members of treatment and control groups. In the course of the period under analysis,

a much higher number of individuals took part in the system and programmes.



70

The general idea arising from the results is that the slight decline in the unemployment spell induced by the

programmes is not significant in the context of long durations. It can also be concluded that the decline is not domi-

nated by job placement, but by the simple cancellation of unemployment registrations. The cancellation of registra-

tions was particularly significant in the REAGE programme, especially for women. The reduction resulting from the

cancellation of registrations suggests a more careful monitoring by system managers as regards non-compliance

with the regulations governing the registered unemployed (for instance, failure of the unemployed to reply to a

request submitted by the services).

The magnitude of results for Portugal is in line with the results documented in literature for other countries, such as

the USA, England and Sweden.3

In view of the national and international evidence, and in spite of the reduction ob-

tained in registered unemployment durations, it is unlikely that in a cost-benefit analysis such programmes imply a

gain for society as a whole. On the one hand, the slight narrowings of unemployment periods are not caused by the

move into employment and, on the other hand, programme implementation costs must be considered.

Table 2

IMPACT OF THE ACTIVATION PROGRAMMES ON UNEMPLOYMENT DURATION

In months

INSERJOVEM programme REAGE programme

All Men Women All Men Women

Removals

Placements(a)

0.18 -0.04 0.21 0.09 0.38 -0.04

(0.21) (0.30) (0.28) (0.33) (0.43) (0.47)

Cancellations(b)

-0.36 -0.38 -0.35 -0.56 -0.42 -0.89

(0.12) (0.18) (0.15) (0.20) (0.27) (0.28)

All(c)

-0.15 -0.22 -0.11 -0.54 -0.48 -0.75

(0.10) (0.15) (0.13) (0.17) (0.22) (0.23)

Sources: IEFP and Banco de Portugal calculations. Standard-deviations in brackets.

Notes: (a) The placements include placements by own means or through the IEFP. (b) The cancellations of registrations are exits from the system due to the non-compliance by the un-

employed of the legal provisions. (c) Includes placements, cancellations and other unspecified exits.

(3) See, for instance, Black, D., Smith, J., Berger, M.and Noel, B., (2003). “Is the threat of reemployment services more effective than the services themselves? Evidence from random

assignment in the UI system.” American Economic Review 93(4): 1313-1327; Blundell, R., Dias, M., Meghir, C. and Reenen, J. V., (2004). “Evaluating the employment impact of a

mandatory job search assistance program”. Journal of the European Economic Association 2(4), 569–606; and, Larsson, L., (2003). “Evaluation of swedish youth labor market

programs”. The Journal of Human Resources 38(4), 891–927.



71

Box 2.7. Developments in the Structure of the Retail Trade Sector in Portugal

In parallel with technical progress,1

the level of regulation is an important determinant of productivity developments

in the retail trade sector. In fact, the existence of barriers to entry in the market and restrictions imposed on opening

hours and type of store allows for the maintenance of inefficient practices and holds back innovation, thereby jeop-

ardising static and dynamic efficiency.

The regulatory framework in the retail trade sector in Portugal showed some relevant changes in the past few

years. Among these, the one that aroused the greatest debate as to its potential effects on the sector’s efficiency

was the regulation of the hypermarkets’ opening hours. According to Executive Order No 153/96 of 15 May, these

establishments may be open Monday to Saturday from 6 a.m. to 12 p.m., and on Sundays and holidays from 8 a.m.

to 1 p.m. In November and December, however, this restriction on the opening hours on Sundays and holidays

does not apply. Three arguments were presented by the legislator for the introduction of this regulation. First, “the

correction of competitive distortions, especially through the introduction of a national standardisation of the open-

ing hours of large shopping centres that does not distort market potential nor perpetuate the divides that were being

felt and that inclusively led to the co-existence, within the same municipality, of establishments with very different

opening hours”. Second, “the promotion of a policy that pursues consolidation and the strengthening of small and

medium-sized enterprises, as an indispensable segment to reconquer the national market, in a job-creating strat-

egy integrating the distribution with small and medium-sized agricultural and industrial enterprises, and that en-

ables, in a level-playing field, the co-existence of all corporate formulas”. Finally, “the preservation of acquired

consumption habits and the fulfilment of consumer supply needs”.

Another important regulatory element was the approval of Decree-Law 218/97 of 20 August that laid down a prior

authorisation regime for the setting-up and modification of “large stores” based on maximum market shares at the

national level and in the area of influence, set at 35 and 45 per cent2 respectively. This situation was changed in

2004 with the approval of the new regime governing retail licences, which simplified the requirements to obtain new

store permits and eliminated the market share system. Finally, in 2005 in the specific segment of non-prescription

medicines, reference should be made to the approval of legislation allowing for the sale of these medicines outside

pharmacies.

As in Portugal, other European countries experienced a halt in the deregulation process in the retail trade sector in

the mid-1990s, with the same type of purpose as mentioned above. As an illustration, in France this translated into

a limit on the number of new large shopping centres and in Spain it translated into the setting of limits to opening

hours.3

The deregulation process was subsequently resumed. In fact, the OECD indicator for the level of regulation

in the retail trade sector shows that most countries, including Portugal, attained progress in reducing regulation

between 1996 and 2003 (Chart 1).

The retail trade sector in Portugal is rather heterogeneous in terms of specialisation and type of store. In 2005, ac-

cording to data from the Directorate General Enterprise, around 44 per cent of retail establishments were in the

food retail segment. In turn, in absolute terms, small establishments with few employees were predominant. Estab-

lishments with an area not exceeding 120 square metres accounted for around 80 per cent of the total and the

share of establishments with only one employee and between two and five employees was around 52 and 39 per

cent respectively.

Developments in the number and type of retail establishments in Portugal may provide relevant information to as-

sess the effects of changes in legislation. However, it should be taken into account that they also result from cycli-

cal developments in the economy and from changes in technology and in consumer preferences. The information

(1) In the US, productivity growth in the retail trade sector has been largely associated with the use of information and communication technologies. For further details see, for example,

Doms, M. Jarmin, R. and Klimek, S. (2003), “IT investment and firm performance in US retail trade”, WP 2003-19, FRBSF.

(2) Executive Order No. 739/97 (Series II) of 26 September.

(3) See ECB (2006), “Competition, productivity and prices in the euro area services sector”, Occasional Paper No. 44, April, ECB .



72

contained in the trade register database4

shows a trend increase in the average size of stores in Portugal. The rise

in the weight of medium-sized establishments and the decline in small stores should be highlighted in this context

(Chart 2). In the most recent period, in the food retail segment, the downward trend of the relative importance of

smaller establishments is also apparent in terms of the turnover structure (Chart 3). In addition, according to the

trade register, there was a downward trend between 1997 and 2004 in terms of the change in the number of retail

establishments with an area exceeding 1500 square metres. This seems to be related to the abovementioned

restrictions imposed by legislation, a situation that changed in 2005 (Chart 4).

Overall, notwithstanding the legislative changes introduced in the Portuguese retail trade sector in the mid-1990s,

the weight of small establishments continued to be structurally reduced. In turn, limitations to the opening of new

hypermarkets and to their opening hours may have contributed to the increase in the weight of medium-sized

establishments.

Chart 1

REGULATION INDEX IN THE RETAIL TRADE

SECTOR

0

1

2

3

4

5

6

Sw

ed

en

Sw

itze

rla

nd

Ire

lan

dA

ustr

alia

Hu

ng

ary

Ko

rea

Ne

the

rla

nd

sT

urk

ey

Me

xic

oU

KP

ort

ug

al

Italy

Ice

lan

dJa

pa

nD

en

ma

rkF

inla

nd

US

AC

an

ad

aN

orw

ay

Ge

rma

ny

Fra

nce

Austr

iaP

ola

nd

Spain

Gre

ece

Belg

ium

Min

0-

Max

62003 1996

Source: OECD.

Note: (a) The indicator gathers information on regulation regarding the trade register, per-

mits, hypermarkets, protection of incumbent enterprises, opening hours and price control.

Chart 2

CHANGE IN THE NUMBER OF RETAIL OUTLETS

Breakdown by display and sale area

0

20

40

60

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

area<50 sq m 50 sq m<area<120 sq m

120 sq m<area<1000 sq m area>1000 sq m

Source: Trade register statistics.

Note: (a) New registrations in the trade register less deductions.

(4) The information obtained in this database does not accurately reflect the developments in the number of establishments with permits on each year, since there are lags between the

time of opening or closing of stores and the updating of the register. These problems are sharper at the level of small establishments and at the time trade register was first

implemented.



73

Chart 3

STRUCTURE OF FOOD RETAIL TURNOVER BY

TYPE OF ESTABLISHMENT(a)

0

20

40

60

1998 1999 2000 2001 2002 2003 2004

As

aperc

enta

ge

ofth

eto

tal

Hypermarkets Supermarkets

Groceries Other

Source: Nielsen, A. C., (in O Comércio em Números No. 8).

Note: (a) Turnover includes all products (i.e. not only food) traded in the establishments

considered.

Chart 4

CHANGE IN THE NUMBER OF LARGE RETAIL

ESTABLISHMENTS WITH AN AREA EXCEEDING

1500 SQ M(a)

0

20

40

60

80

100

120

140

160

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Trade register statistics.

Note: (a) New registrations in the trade register less deductions.

3. OUTPUT, EXPENDITURE AND EXTERNAL ACCOUNTS

3.1. Overview

Banco de Portugal estimates indicate that the Portuguese economy grew by 0.3 per cent in 2005,

which corresponds to a deceleration of 0.8 percentage points from 2004 (Table 3.1). The current esti-

mate points to activity growth below that of the euro area by around 1 p.p. As a result of the negative

growth differential observed since 2002, the divergence between per capita income in Portugal and the

euro area has been increasing.

The economic slowdown in 2005 was mainly determined by a fall in investment and a significant de-

cline in the contribution of exports to GDP growth. Private consumption continued to grow clearly

above GDP, albeit decelerating in the course of the year. In turn, public consumption accelerated com-

pared with the previous year. Against this background, and despite the fall in investment, external

borrowing requirements rose further.

The recent performance of the Portuguese economic activity is characterised by the absence of a sus-

tained recovery, in contrast with that seen following the 1993 recession. In fact, although the deceler-

ation in economic activity was more marked during the previous recession, the pace of growth was

nonetheless higher, and the drop in activity was followed by a clear acceleration in GDP (Chart 3.1).

The comparison with the previous business cycle also shows that recent developments are character-

ised by stronger growth in private consumption and a much more adverse behaviour of exports and in-

vestment, the two expenditure components that are typically more buoyant in recoveries, particularly in

small open economies.

The negative growth differential between Portugal and the euro area since 2002 has reflected the

strong fall in investment in Portugal and, to a lesser extent, a more favourable performance of exports


Output, Expenditure and External Accounts | Chapter 3

75

Table 3.1

GDP AND MAIN EXPENDITURE COMPONENTS(a)

Real rate of change

Per cent

Weights in 2004 2001 2002 2003 2004 2005

GDP 100.0 2.0 0.8 -1.2 1.1 0.3

Private consumption 64.4 1.3 1.3 0.0 2.3 1.8

Public consumption 20.6 3.3 2.6 0.7 1.6 1.9

Investment 22.9 1.2 -4.7 -9.8 1.1 -3.7

GFCF 22.3 1.0 -3.5 -10.0 0.0 -2.7

Change in inventories(b)

0.1 -0.4 0.0 0.2 -0.2

Domestic demand 107.8 1.7 0.1 -2.2 1.9 0.6

Contribution of domestic demand(b)

1.8 0.1 -2.4 2.0 0.7

Exports 28.6 1.8 1.4 3.7 5.3 0.9

Goods 20.9 1.5 1.8 6.3 4.3 1.0

Tourism and other services 7.7 2.6 0.5 -3.4 7.9 0.8

Imports 36.4 0.9 -0.7 -0.5 7.0 1.7

Goods 31.2 1.3 -0.3 0.5 6.9 1.6

Tourism and other services 5.2 -1.6 -2.9 -6.0 7.8 2.5

Contribution of net external demand(b)

0.2 0.7 1.2 -1.0 -0.4


Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 2000 to 2003. (b) Contribution to the GDP rate of change in percentage points.


Chapter 3 | Output, Expenditure and External Accounts

76

Chart 3.1

GROSS DOMESTIC PRODUCT


GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

t-2 t-1 t t+1 t+2

Per

cent

1993 recession

2003 recession

Private consumption

-2

0

2

4

6

8

10

12

t-2 t-1 t t+1 t+2

Per

cent

1993 recession

2003 recession

GFCF

-12

-8

-4

0

4

8

12

t-2 t-1 t t+1 t+2

Per

cent

1993 recession

2003 recession

Exports

-4

0

4

8

12

t-2 t-1 t t+1 t+2

Per

cent

1993 recession

2003 recession

Imports

-4

0

4

8

12

t-2 t-1 t t+1 t+2

Per

cent

1993 recession

2003 recession

External demand

-4

0

4

8

12

t-2 t-1 t t+1 t+2

Pe

rce

nt

1993 recession

2003 recession

Corporate GFCF

-8

-4

0

4

8

12

t-2 t-1 t t+1 t+2

Pe

rce

nt

1993 recession

2003 recession


Note: t corresponds to 1993 and 2003, respectively.

in the euro area. In contrast, private consumption has been growing faster in Portugal than in the euro

area in the most recent years (Chart 3.2).

Although external demand maintained a significant pace of growth, the deterioration in the competi-

tiveness of the Portuguese economy, against a background of increased competition in international

markets, has limited the contribution of exports to GDP growth. The increase in relative labour costs

over the last decade and the Portuguese export structure are the main factors with a negative impact

on the performance of exports. The Portuguese export structure continues to show a high weight of low

-skill and low-tech goods, such as textiles, clothing and footwear, which have faced increased competi-

tion from new low-cost players in world trade. Available data point to significant falls in the value of ex-

ports of this type of goods in 2005. The loss of market share has also affected a number of sectors of



77

Chart 3.2

GROSS DOMESTIC PRODUCT IN PORTUGAL AND IN THE EURO AREA


GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005

Pe

rce

nt

Euro area

Portugal

Private consumption

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005

Pe

rce

nt

Euro area

Portugal

GFCF

-12

-8

-4

0

4

2001 2002 2003 2004 2005

Pe

rce

nt

Euro area

Portugal

Exports

0

2

4

6

8

2001 2002 2003 2004 2005

Pe

rce

nt

Euro area

Portugal

Imports

-4

0

4

8

2001 2002 2003 2004 2005

Pe

rce

nt

Euro area

Portugal

Sources: Eurostat, INE and Banco de Portugal.

intermediate technological content, such as the automobile and the electrical machinery sectors,

which acquired a significant importance in the Portuguese export structure, following major foreign di-

rect investment projects developed in the mid-1990s. Moreover, adverse developments in the confi-

dence of economic agents, against a background of uncertainty about demand growth prospects and

the manner in which the main imbalances in the economy will be corrected, have negatively affected

investment decisions over the past few years.

3.2. Output

The increase in commodity and energy prices and the maintenance of sustained growth of labour

costs, in a context where the deterioration of labour market conditions does not seem to have led to an

appropriate adjustment of real wages, have negatively affected domestic output in 2005. The services

and energy sectors continued to grow at a faster pace than GDP, while the remaining sectors of activity

experienced a contraction in output (Table 3.2).

Following the trend observed in previous years, the relative weight of the services sector in the Portu-

guese productive structure rose further. Activity growth in this sector was largely determined by the

strong buoyancy of “financial activities” in all its sub-sectors, namely banking, insurance and other fi-

nancial intermediaries. At the same time, activity in “trade and repair” decelerated in 2005, which is

consistent with the behaviour of private consumption, while growth in “hotels and restaurants” was

similar to that of 2004. In turn, activity in the “transport and communications” sub-sector fell sharply

across the different types of transport and the various telecommunication services. With regard to the

remaining services sub-sectors, activity in “health” decelerated, while the gross value added in “educa-

tion” and “general government” remained relatively stable (see Supplementary Table A.3.1). In these

sectors, which mainly comprise non-market services, employment grew significantly over the past two

years (see “Chapter 5 Employment and Wages”). In the services sector as a whole, the change in

labour productivity was virtually nil.

After weak growth in 2004, activity in manufacturing fell further in 2005, more markedly in the first half

of the year. The decline in industrial activity in 2005 was largely determined by developments in the



78

Table 3.2

GROSS VALUE ADDED BY SECTOR OF ACTIVITY(a)

Real rate of change

Per cent

Weights in 2003(b)

2001 2002 2003 2004 2005

Agriculture, forestry and fishing 3.4 -3.2 2.4 -3.1 -0.1 -7.4

Mining and quarrying 0.4 7.4 -10.7 0.2 2.2 -6.7

Manufacturing 15.8 1.4 -0.4 -0.8 0.4 -1.5

Electricity, gas and water 2.5 3.6 0.3 6.5 5.7 5.4

Construction 6.7 2.8 -4.0 -12.7 -1.9 -5.2

Services 71.2 2.9 1.5 0.4 1.9 1.5

GVA 100.0 2.4 0.8 -0.8 1.4 0.4

Memo:

GDP(c)

- 2.0 0.8 -1.2 1.1 0.3


Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 2000 to 2003. (b) As a percentage of nominal GVA. (c) GDP at market prices. The nominal value of

GDP includes, in addition to sectoral GVAs, VAT and import taxes.

so-called traditional industries, such as textiles, clothing and footwear, with particularly marked falls in

production. In these industries, however, employment also declined significantly in 2005. Against this

background, there were productivity gains, which may be reflecting, inter alia, the closure of less com-

petitive firms and the dismissal of less productive workers (see Section 3 of Chapter 2 “Structural is-

sues”). The contrast between the services sector – characterised by an increase in employment and

negative developments in productivity – and manufacturing – characterised by a decline in employ-

ment and growth in productivity – is part of a trend seen in the Portuguese economy over the past few

years (Chart 3.3).

The decline in activity in the agriculture and construction sectors was particularly sharp. The long pe-

riod of drought in 2005 together with the implementation of the 2003 reform of the Common Agricul-

tural Policy, which entails the replacement of production-linked aid for direct income aid to farmers,

have contributed to the decline in agricultural output. On the other hand, lower activity in construction is

consistent with the deteriorating confidence in this sector and adds to the recent trend, following the

strong expansion in the second half of the 1990s.

3.3. Expenditure

As previously mentioned, GDP average growth stood at 0.3 per cent in 2005 (1.1 per cent in 2004). It

should be noted that the estimates presented in this report include the new National Accounts series

released by INE (see “Box 3.1 The base 2000 of Portuguese National Accounts”).

The annual GDP growth estimate incorporates a slight acceleration in activity over the second half of

the year, despite the deceleration in private consumption and the persistent fall in GFCF. Therefore,

improvements in activity over the second half of the year reflect the more favourable contribution of net

external demand, as a result of lower import growth, as well as an acceleration in exports.1

The

intra-annual behaviour of GDP was similar to that seen in the euro area, where activity accelerated



79

Chart 3.3

EMPLOYMENT AND GROSS VALUE ADDED IN THE

SERVICES AND MANUFACTURING SECTORS

1999-2005

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

-5.0 -3.5 -2.0 -0.5 1.0 2.5 4.0 5.5

Real growth of GVA, per cent

Em

plo

ym

en

tg

row

th,

pe

rce

nt

45º

Manufacturing

Services

2005

1999

2005

2000

2000

20022004

2004

1999

2002

2003

2001

2001

2003


(1) According to Banco de Portugal estimates, between the first and second semester of 2005, exports of goods and services accelerated from -0.4 to 2.3 per

cent, year-on-year, while the rate of change in imports declined from 3.5 to 0.1 per cent.

also over the second half of the year. However, in contrast to Portugal, the more favourable behaviour

of economic activity in the euro area in the second half of 2005 reflected both more positive

developments in exports and higher growth in GFCF.

Private consumption decelerated, on average, from 2.3 per cent in 2004 to 1.8 per cent in 2005, albeit

maintaining a growth rate clearly higher than that of GDP. Developments in private consumption were

consistent with lower growth in household disposable income, which also decelerated in real terms

from 2004. However, private consumption continued to grow at a faster pace than disposable income,

causing the savings rate to fall further (Table 3.3).

The loss of buoyancy in disposable income reflected chiefly the lower growth of compensation of em-

ployees, as a result of both a slight deceleration in real compensation per employee and, mainly, less

favourable developments in the number of wage earners. Transfers to households also decelerated in

2005, albeit continuing to grow far above disposable income, mainly reflecting the continuing strong

growth in social benefits paid by the general government, in particular those related to pensions. The

high pace of growth of domestic transfers to households in recent years - a flow which is not directly as-

sociated with the remuneration of productive factors and is typically associated with a higher propen-

sity to consume - has led to an increasing weight of this component in disposable income: in 2005

domestic transfers to households accounted for around 30 per cent of household disposable income,

compared with a value close to 20 per cent in 1996.

With interest rates staying at low levels, in some cases associated with a squeeze in banks’ profit mar-

gins and the lengthening of loan maturities and the introduction of new products in the credit market,

debt burden growth was held in check, helping smooth household consumption expenditure in relation

to disposable income. New products introduced in the credit market include the ability to convert

short-term uncollateralised liabilities into medium and long-term collateralised liabilities (typically mort-

gage credit at more favourable interest rates); grace periods during the first years of the loan; the



80

Table 3.3

HOUSEHOLD DISPOSABLE INCOME(a)

Nominal rate of change

Per cent

2001 2002 2003(b)

2004 2005

Household disposable income 5.7 4.0 2.8(3.0) 4.3 (4.1) 3.3

Compensation of employees(c)

5.5 5.1 2.3 (1.8) 4.2 (4.7) 4.0

Corporate and property income 4.5 1.6 2.8 -2.0 -0.3

Current transfers 9.1 4.7 5.8 8.9 5.5

Domestic transfers 10.1 9.7 8.1 9.7 7.2

External transfers 3.9 -23.5 -12.5 0.5 -12.4

Direct taxation (-) 5.2 1.4 1.5 (-0.9) 0.9 (3.8) 5.3

Social security contributions (-) 6.1 5.4 4.3 (2.8) 4.7 (6.7) 3.8

Adjustment for the change in net equity of households

in pension fund reserves

-31.7 -28.6 -56.4 251.2 25.1

Memo:

Private consumption 4.7 4.4 2.9 4.8 4.1

Savings 13.8 0.5 -0.9 (4.0) -0.5 (-2.4) -4.5

Savings rate (as a percentage of disposable income) 10.9 10.5 10.4 (10.6) 9.9 9.2

Consumer price index 4.4 3.6 3.3 2.4 2.3


Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 2000 to 2003. (b) In 2003 figures are adjusted for the direct effects of the sale of tax credits by the gen-

eral government. (c) Remuneration received by resident households. Includes social security contributions by employers and government transfers to the Caixa Geral de Aposentações.

adoption of variable deadlines for the repayment of loans (which facilitate the maintenance, within cer-

tain limits, of the debt service when interest rates change); or even the possibility to pay a significant

share of the loan at the end of the contract.

Private consumption slowed clearly throughout the year, in line with worsening consumer confidence

(Chart 3.4). In fact, between the first and second halves of 2005 the growth rate of private consumption

declined from 2.5 to 1.1 per cent. Among the factors that contributed to the loss of buoyancy in private

consumption in the second half of 2005 were unfavourable labour market developments, tax hikes in

the middle of the year, which also heightened perception of the seriousness of the fiscal situation and,

to a smaller extent, expectations of a rise in interest rates from September onwards, against a

background of high household indebtedness.

At the end of May, the announcement of a rise in the standard VAT rate as from 1 July led to a some-

what irregular intra-annual profile of private consumption. Indeed, this announcement seems to have

brought forward purchase decisions by consumers, namely regarding durable consumer goods. This

translated into a slight acceleration in private consumption between the first and second quarters.

Such developments were particularly apparent for sales of motor vehicles, which rose year-on-year by

around 35 per cent in June. The strong growth in consumption expenditure extended to other durable

consumer goods. In June, the year-on-year rate of change in the retail trade turnover index of durable

goods, excluding motor vehicles, stood at 21 per cent in real terms.

Banco de Portugal estimates point to higher real growth of public consumption compared to 2004. Be-

hind such developments were the rise in the number of civil servants, as well as the significant growth

of transfers to corporate hospitals and of expenditure on the purchase of goods and services.

In 2005, GFCF declined further, after sharp falls in 2002 and 2003 and a near stagnation in 2004. The

cumulative decline in GFCF since 2001 totals more than 15 per cent and the investment rate was lower

in 2005 than in the mid-1990s (Chart 3.5). The unfavourable behaviour of GFCF was largely deter-

mined by developments in the construction component, which declined very markedly from the previ-



81

Chart 3.4

PRIVATE CONSUMPTION COINCIDENT INDICATOR

AND CONSUMER CONFIDENCE INDICATOR

-2

-1

0

1

2

3

4

5

6

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

Pe

rce

nt

-55

-50

-45

-40

-35

-30

-25

-20

-15

-10

s.r

.e

Private consumption coincidentindicator

Consumer confidence indicator(right-hand scale)

Sources: European Commission and Banco de Portugal.

Chart 3.5

DEVELOPMENTS IN INVESTMENT

18

20

22

24

26

28

30

32

1995 1997 1999 2001 2003 2005

As

ap

erc

en

tag

eo

fG

DP

-12

-8

-4

0

4

8

12

16

Pe

rce

nt

Investment rate

(in nominal terms)

Change in volume

(RHS)


ous year. GFCF in transport equipment also declined, mainly due to the fall in investment in motor

vehicles, and GFCF in machinery and metal products decelerated somewhat from 2004.2

The fall in

GFCF was particularly marked in the second half of 2005, which is consistent with the deterioration of

confidence in manufacturing and construction. According to Banco de Portugal estimates, between

the first and second halves of 2005, the year-on-year change in GFCF declined from -1.7 to -3.5 per

cent.

The behaviour of GFCF in the most recent period may be reflecting unfavourable developments in

confidence amid some uncertainty about demand growth prospects. According to the “Inquérito ao

Investimento”, the INE Investment Survey, most firms continue to indicate the deterioration in sales

prospects as the main factor limiting investment, whose relative importance has increased over the

past few years, to the detriment of other factors such as difficulties in obtaining credit, or the interest

rate level. In turn, data obtained from the Bank Lending Survey suggest that current favourable financ-

ing conditions are being used by companies to foster their current economic activity and to restructure

debt rather than to make new investments (see “Chapter 7 Financial Situation”).

Against a background where investment decisions have a strong prospective component and where a

significant reallocation of resources in the Portuguese economy is deemed necessary, the current cli-

mate of uncertainty may also be associated with doubts about how the main imbalances in the econ-

omy shall be corrected and about the implementation of structural reforms required to increase

productivity. Indeed, factors such as the predictability of the tax system, labour force skills (due to the

complementary nature of investment in physical capital and human capital) and the existing institu-

tional framework (in particular with regard to market flexibility) are important factors affecting corporate

investment decisions.

In 2005, exports of both goods and services decelerated markedly, whereas, despite a slight slow-

down, external demand impacting on the Portuguese economy maintained a strong pace of growth. As

a result, there were significant market share losses, as in 2004 (Chart 3.6). On the other hand, the

profit margin of the Portuguese export sector declined again, largely reflecting continued growth of unit

labour costs at a faster pace than that of major trading partners, in a context where Portuguese export-

ers lack the ability to influence prices in international markets.

The loss of export market share over the past few years has been broadly based across the euro area,

suggesting the presence of some common explanatory factors. These common factors may include

not only some loss in competitiveness associated with the euro appreciation over this period, but also

the intensification of the globalisation process, which has led to a growing participation of developing

economies in world trade. However, the deterioration in the relative performance of Portuguese ex-

ports suggests that specific factors also contributed decisively to the loss of market share of domestic

exports. Relative cost indicators calculated by Banco de Portugal point to deteriorating competitive-

ness of Portuguese exports over the past few years, largely due to higher growth of unit labour costs in

Portugal (Chart 3.7). The performance of domestic exports has also been affected by the pattern of

specialisation. The proportion in the Portuguese export structure of low-tech and low-skill goods, such

as textiles, clothing and footwear, remains high. The latter have faced fiercer competition from new

players in world trade who are low-cost producers. Available data point to sharp falls in the export value

of this type of good in 2005.3

Moreover, there has been a loss of market share in some mid-tech sec-

tors, such as the automobile and electrical machinery sector, which have gained a significant weight in

the Portuguese export structure following sizeable foreign direct investment projects implemented in



82

(2) In 2005 sales of light commercial vehicles fell by 1.5 per cent, which compares with an increase of 2.2 per cent in 2004, and sales of heavy commercial

vehicles decelerated, from a growth rate of 23.9 per cent in 2004 to 0.5 per cent.

(3) Exports of clothing, footwear, wood and cork, which together account for around 20 per cent of Portuguese exports, declined in nominal terms by 9.8, 4.8

and 1.1 per cent respectively in 2005.

the mid-1990s (see “Box 2.3 Portuguese export market share: an analysis in the main export

markets”).

With regard to markets of destination, Portuguese exports to the German, British and US markets de-

clined, in nominal terms, which points to a very marked loss of market share in those countries (Charts

3.8 and 3.9). The market share of Portuguese exports in Germany and the United Kingdom has been

declining over the past few years, which seems to be due to increased competition from Central and

Eastern European economies and from Asian developing economies. By contrast, in 2005 Portuguese

exports to the Spanish market, which already account for more than 25 per cent of total exports, and to

a number of emerging or developing economies grew strongly. However, the Spanish (and also the

French) market recorded a loss of market share of exports in 2005, after the gains observed in the past

years.

Following the strong growth in 2004, imports of goods and services decelerated very markedly in 2005,

consistently with the lower growth of weighted global demand. According to available data, deceler-

ation in imports was broadly based across all types of goods. However, purchases abroad of motor ve-

hicles and other transport material, as well as food and textiles, fell in nominal terms. Conversely, the

value of imported fuels accelerated, mainly reflecting the strong increase in international oil prices.

As in recent years, the growth rate of imports was higher than that for domestic demand, which re-

sulted in a further increase in the rate of import penetration of goods and services. Behind this was the

downward trend of the relative price of imports of consumer goods and equipment goods, which

pointed to some replacement of domestic production by imported goods at lower prices (Chart 3.10).



83

Chart 3.6

MARKET SHARE OF PORTUGUESE EXPORTS OF

GOODS - IN VOLUME(a)

-6

-4

-2

0

2

4

6

8

10

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Market share

Foreign demand(b)

Portuguese exports

Sources: European Commission, INE, UK Office for National Statistics and Banco de

Portugal.

Notes: (a) Real growth of total exports of goods (excluding exit from the territory of aircraft

equipment after being repaired) vs. real growth of foreign demand. An increase means a

gain in the market share of Portuguese exports. (b) Real growth of imports of goods from

major trading partners. The 17 countries selected account for approximately 90 per cent

of total exports. Each individual country was weighted according to its share as export

market in the previous year.

Chart 3.7

EFFECTIVE EXCHANGE RATE INDICES FOR

PORTUGAL(a)

96

100

104

108

112

116

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

19

96

=1

00

Relative unit labour costs - whole economy

Relative unit labour costs - manufacturing

Relative consumer price index

Relative goods and services export prices

Sources: European Commission, INE, OECD and Banco de Portugal.

Note: (a) Costs/prices with respect to 13 major trading partners up to 1999 and to 22 ma-

jor trading partners as from 1999, both adjusted for changes in the nominal exchange

rate. A positive change denotes an increase in relative costs/prices of Portuguese

exporters.

3.4. Current and Capital Accounts

Net external borrowing requirements of the Portuguese economy, as measured by the combined cur-

rent and capital account deficit, rose further in 2005, standing at 8.1 per cent of GDP (Table 3.4). Ac-

cordingly, the external imbalance widened as already seen in 2004, and following the adjustment in

2002 and 2003. Given that the investment level as a percentage of GDP declined in 2005, higher bor-



84

Chart 3.8

CHANGE IN THE MARKET SHARE OF GOODS

EXPORTS IN MAJOR MARKETS

Nominal figures

-30

-20

-10

0

10

20

30

40

Spain France Germany United

Kingdom

United

States

Italy

Pe

rce

nt

2001-2004 2005

Source: INE.

Note: Countries are sorted in descending order according to their weight in the value of

Portuguese exports in 2004.

Chart 3.9

CONTRIBUTIONS TO THE NOMINAL GROWTH OF

GOODS EXPORTS IN 2005

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Ge

rma

ny

Un

ite

dK

ing

do

m

Belg

ium

United

Sta

tes

Ma

laysia

Au

str

alia

Spain

Sin

ga

po

re

Angola

Ch

ina

Tu

rke

y

Fra

nce

Inp

erc

en

tag

ep

oin

ts

Main positive

contributions

Main negative

contributions

Source: INE.

Note: Countries are sorted in descending order according to their weight in the value of

Portuguese exports in 2004.

Chart 3.10

RATE OF IMPORT PENETRATION OF GOODS AND

SERVICES(a)

Rate of change

-6

-4

-2

0

2

4

6

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

In volume In value


Note: (a) Nominal (real) growth of imports of goods and services versus nominal (real)

growth of domestic demand. An increase denotes a higher penetration of foreign prod-

ucts in the Portuguese market.

rowing requirements continued to be explained by the decline in domestic savings, both from the pri-

vate and the public sectors,4

reflecting easier financing of the external deficit in international markets,

against a background of low interest rates and the lack of foreign exchange risk (Chart 3.11).

Although household savings declined further in 2005, the net financing capacity of this institutional

sector increased to 3.4 per cent of GDP (Table 3.5). This rise was exclusively due to the strong expan-

sion of capital transfers, as a result of the high amount of extraordinary contributions by financial insti-

tutions to their pension funds (see “Chapter 7 Financial Situation”). Therefore, despite a slight

deceleration of corporate investment, net borrowing requirements of the private sector rose in 2005,



85

Table 3.4

CURRENT ACCOUNT AND CAPITAL ACCOUNT


2001 2002 2003 2004 2005

Current account -9.8 -7.8 -5.9 -7.3 -9.3

Current account -12.0 -10.4 -9.1 -10.5 -11.4

Services 2.2 2.5 2.6 2.9 2.8

of which:

Travel and tourism 2.9 2.8 2.7 2.9 2.7

Income -2.9 -2.1 -1.5 -1.7 -2.1


of which:

Emigrants’/immigrants’ remittances 2.6 1.8 1.4 1.4 1.2

Capital account 0.9 1.5 1.9 1.6 1.2

Memo:

Current account+ capital account -8.9 -6.4 -4.0 -5.7 -8.1


Chart 3.11

INVESTMENT, DOMESTIC SAVINGS AND

FINANCING CAPACITY OF THE ECONOMY


-20

-10

0

10

20

30

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Investment

Domestic savings

Current account + Capital account = financing capacity

of the economy


(4) In the analysis figures for 2003 and 2004 are adjusted for direct effects of the securitisation of tax arrears and for the transfer of pension fund reserves from

public enterprises to the general government. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004”

Annual Report, 2004, Banco de Portugal. 444444444

reflecting the deterioration of the financing capacity of non-financial corporations. In parallel, general

government borrowing requirements increased, against a background of deteriorating fiscal situation

vis-à-vis 2004 (Chart 3.12).

The higher Portuguese external imbalance in 2005 largely reflected the behaviour of the goods ac-

count, whose deficit stood at 11.4 per cent of GDP.5

Conversely to 2004, when the deterioration in the

goods account was largely determined by an adverse volume effect (higher import growth in real terms



86

Table 3.5

NET LENDING(+) / NET BORROWING(-) BY SECTOR(a)


2001 2002 2003(b)

2004(b)

2005

Private sector -4.6 -3.5 -1.0 (1.2) -2.5 (-0.4) -2.1

of which:

Households 2.6 2.9 3.4 (3.5) 2.9 3.4

Corporations -7.2 -6.4 -4.4 (-2.3) -5.4 (-3.3) -5.5

Non-financial corporations -7.4 -6.0 -4.5 (-2.4) -4.2 (-3.8) -5.1

Financial sector 0.2 -0.4 0.1 -1.3 (0.5) -0.4

General government(c)

-4.3 -2.9 -2.9 (-5.2) -3.2 (-5.3) -6.0

External sector 8.9 6.4 4.0 5.7 8.1

Memo:

Non-financial private sector -4.7 -3.1 -1.1 (1.1) -1.2 (-0.8) -1.7


Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 2000 to 2003. (b) In 2003 and 2004, figures are adjusted for direct effects of the sale of tax credits and

the transfer of pension fund reserves of public corporations to the general government. (c) General government net borrowing requirements obtained on a national accounts basis in

ESA95 differ slightly from the deficit figure calculated in line with the excessive deficit procedure, given that in the latter case swap and forward rate agreements are considered as non-fi-

nancial transactions, which affects interest payments.

Chart 3.12

SAVINGS AND INVESTMENT (PRIVATE SECTOR

AND GENERAL GOVERNMENT)(a)


-5

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Investment

Savings

Investment

General government

Private sector

Savings


Note: (a) In 2003 and 2004, figures are adjusted for direct effects of the sale of tax credits

and the transfer of pension fund reserves of public corporations to the general govern-

ment.

(5) Excluding fuel imports and exports, the goods balance stabilised compared to 2004.

than export growth), the strong increase in imported fuel prices in 2005 caused the effect associated

with the loss in terms of trade to account for a greater share of the deterioration of the deficit (Chart

3.13).6

In 2005, price changes in exports and imports of goods were 2.1 and 4.0 per cent, respectively.

The remaining components of the current and capital accounts also deteriorated. The services ac-

count surplus as a percentage of GDP declined somewhat in 2005. After the strong growth in 2004, as-

sociated with the European Football Championship in Portugal, tourism receipts grew more

moderately in 2005 (1.1 per cent), while imports of tourism services expanded strongly (11.2 per cent).

The income account deficit as a percentage of GDP deteriorated again, across all types of investment.

The downward trend of the balance of emigrants/immigrants remittances, which is the main compo-

nent of the current transfers account, continued in 2005. This reflected not only the decline in remit-

tances particularly from France, the United States and the United Kingdom, but also the increase in

immigrants’ remittances, mainly to Brazil. Moreover, there were lower current and capital inflows from

the European Union, stress being laid on a fall of around 20 per cent in transfers associated with the

European Regional Development Fund. As a result, the current transfers balance and the capital

account balance deteriorated compared to 2004.



87

Chart 3.13

BREAKDOWN OF THE CHANGE IN THE GOODS

ACCOUNT(a)

-3000

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

2000

Total

account

Volume

effect

Price effect Terms

of trade

effect

EU

Rm

illio

n

2002 2003 2004 2005


Note: (a) A positive (negative) change means an increase (decrease) in the goods bal-

ance. For a description of the methodology used for the breakdown of the change in the

goods balance, see pp. 179, Annual Report 2003, Banco de Portugal.

(6) Excluding the energy component, there is a gain in terms of trade of 0.9 p.p., which corresponds to changes in export and import prices of 1.3 and 0.4 per

cent respectively.



88

Box 3.1 The base 2000 of Portuguese National Accounts

The estimates presented in this report include the new series of Portuguese National Accounts (base 2000) for the

period 1995-2003 released by the National Statistical Institute (INE) in March 2006. This base 2000 information

corresponds to final accounts for the 2000-2002 period. Data for the 1995-1999 period, as well as provisional esti-

mates for the year 2003, obtained by the INE by extrapolation from the previous base-year values for the national

accounts (base 1995) were also released.

The revision of the National Accounts base (which, according to Community regulations, should be carried out on a

regular basis) aimed to include and adapt new statistical sources and to update (or, whenever necessary, to

change) methodological procedures.

Main statistical and methodological changes:1

The main methodological change resulting from the move from base 1995 to base 2000 of the National Accounts is

related to the treatment of the financial intermediation services indirectly measured (FISIM). This methodological

change included adjustments in the calculation method and the breakdown by user, and had a special impact on

GDP levels.

The FISIM correspond to the production of intermediation services by financial institutions in deposits and loans,

i.e., they refer to the component of the services provided by financial intermediaries for which no fee or commission

is directly collected. Its value is obtained by an indirect measure that corresponds to the difference between inter-

est paid and received by financial intermediaries. In the previous base (base 1995), the FISIM were not broken

down by type of utilisation. Therefore, it was agreed that the total production of such services (entered in the finan-

cial companies sector and in the respective branch of activity, i.e., financial activities) was classified as intermedi-

ate consumption of a fictitious sector/branch, which, since it had no actual production, registered a negative value

added corresponding to the same figure. This negative value added was fully deducted from the value added of all

institutional sectors and branches of activity, wherefore the level of GDP was not affected by the figure registered

as FISIM production.

In base 2000, and according to a new regulation adopted by the European Union countries, these services will be

broken down (consumed) by user institutional sector/branch of activity. The utilisation of the FISIM ceases to be

fully registered as intermediate consumption and shall henceforth be considered as final consumption (of house-

holds, the general government and non-profit institutions serving households) and as exports/imports of such ser-

vices, which will affect total GDP level. The share that is considered as intermediate consumption shall be allo-

cated to user branches of activity and institutional sectors, thus leading to a decline in the respective gross value

added levels. The change in final consumption of household’s FISIM is offset by an identical revision of disposable

income, so that the level of savings and financing capacity remain unchanged.

In addition to changes in the FISIM, the introduction of base 2000 reflected a number of statistical and methodologi-

cal changes, namely:

• Incorporation of the General Census of Population and Housing – Census 2001. This information had a

special impact on a number of aggregates of the National Accounts, leading, inter alia, to an increase in

employment levels (and indirectly in wages) and in housing rents (effective and imputed).

• Incorporation of the Survey of Household Budgets 2000 (regular survey with detailed information on

household expenditure), with a particular impact on the estimates of final household consumption by

product.

(1) For a more detailed description of the changes introduced and the resulting impact of the new base of the National Accounts, please refer to INE’s Press Releases “Nova série de

contas nacionais portuguesas” of 29 July 2005 and “Contas Nacionais Base 2000" of 10 March 2006.



89

• Revision of International Trade data, namely due to the revision of the estimates for transactions below

the reporting ceiling (mandatory reporting to the INE) in intra-community trade.

Main revisions of the national account aggregates

The average revaluation of the GDP nominal value for the period made available by the INE (1995-2003) attained

5.4 per cent vis-à-vis the base-1995 values. In addition, GDP rates of change in volume were revised upwards (by

0.2 p.p.) (Charts 1 and 2). Table 1 presents the revisions of the main aggregates of National Accounts in both level

and rates of change in volume. In the base year, GDP at current prices was revalued by 5.8 per cent, which corre-

sponds to an upward revision of €6,722 million, €1,968 million of which were due to the new accounting methodol-

ogy of the FISIM (corresponding to 1.6 per cent of GDP level).

The revision of GDP levels was chiefly determined by the upward revision of private consumption levels. In addi-

tion, investment levels were revised upwards, whereas net external demand levels declined vis-à-vis the ba-

se-1995 values (imports were revised upwards and exports downwards). These changes in levels of the main

components of expenditure were reflected in changes in the weights of those items in GDP, i.e., an increase in the

relative weight of private consumption and a decrease in the weight of exports. An important share of the revision

of consumption levels (which in the base year stood at €6,516 million) is explained by the incorporation of con-

sumption values of FISIM (€1,660 million corresponding to private consumption in 2000) and by the revision of the

rent component (€1,903 million in the base year). Additionally, the incorporation of new statistical sources trans-

lated into an increase in private consumption levels in different products.

The profile of real GDP and its main components does not change substantially in the period in question

(1995-2003) vis-à-vis the previous base 1995 National Account series. The slight increase in GDP average

growth was mainly the result of the upward revision of private consumption growth rates in volume (0.3 p.p. per

year, on average, in the 1995-2003 period). In turn, real growth of exports was revised downwards by 0.4 percent-

age points in annual average.

Chart 1


Current prices

70000

80000

90000

100000

110000

120000

130000

140000

150000

1996 1997 1998 1999 2000 2001 2002 2003

EU

Rm

illio

n

Base 2000

Base 1995

Source: INE.

Chart 2


Real rate of change

-2

-1

0

1

2

3

4

5

6

1996 1997 1998 1999 2000 2001 2002 2003

Pe

rce

nt

Base 2000

Base 1995

Source: INE.



90

Table 1 (A)

REVISIONS OF GDP AND MAIN EXPENDITURE COMPONENTS

Revisions of levels at current prices (Base 2000 - Base 1995)

EUR millions

Private

consumption

Public

consumption

Investment Gross fixed

capital

formation

Change in

inventories

Exports Imports GDP

1995 4285 241.5 204.0 701.7 -496.7 -77.0 344.0 4311.2

1996 4328 136.8 431.0 718.0 -286.0 -225.0 393.0 4277.6

1997 4723 81.8 733.0 920.7 -187.7 -310.0 344.0 4883.8

1998 4926 42.4 1058.0 1118.6 -61.6 -293.0 295.0 5437.5

1999 5425 3.1 1158.0 1154.5 3.5 -216.0 207.0 6163.2

2000 6516 -73.0 619.0 683.2 -65.3 -62.0 277.0 6721.9

2001 6545 -160.0 857.0 960.0 -103.0 -135.0 348.0 6758.0

2002 6673 -54.3 1159.1 1673.5 -514.4 -492.6 310.4 6975.8

2003 6918 -43.0 1085.0 1460.0 -375.0 -702.0 245.0 7012.0

Table 1 (B)

REVISIONS OF GDP AND MAIN EXPENDITURE COMPONENTS

Revisions of levels at current prices (Base 2000 - Base 1995)

Per cent

Private

consumption

Public

consumption

Investment Gross fixed

capital

formation

Change in

inventories

Exports Imports GDP

1996 0.3 0.0 1.5 0.0 0.3 -1.2 0.2 0.1

1997 0.3 0.0 1.2 0.4 0.2 -0.9 -0.2 0.2

1998 0.2 0.2 0.7 0.3 0.1 -0.7 0.0 0.2

1999 0.1 0.1 0.0 -0.2 0.0 0.2 0.2 0.1

2000 0.8 -0.6 -0.3 -0.3 0.0 0.6 -0.2 0.5

2001 0.2 0.1 0.1 0.2 0.0 0.4 -0.2 0.3

2002 0.2 0.3 0.3 1.6 -0.3 -0.5 -0.5 0.3

2003 0.3 0.0 0.1 -0.1 0.1 -1.2 -0.4 0.0

Source: INE.

4. EMPLOYMENT AND WAGES

4.1. Overview

The behaviour of the Portuguese labour market has been affected by both cyclical and structural fac-

tors. In particular, changes in the international trade pattern give rise to significant adjustments in the

productive structure, implying a reallocation of employment by sector in the economy (see “Section 3

of Chapter 2 Structural Issues”). In addition, demographic developments, still characterised by an in-

crease in the labour force, affect labour supply and the evolution of wages. Finally, the new macroeco-

nomic environment, resulting from participation in the euro area, which is characterised by lower and

more stable inflation rates than in the past, seems to be associated with higher wage rigidity in the

economy.

4.2. Employment and Unemployment

In 2005 there was a stagnation in total employment and an increase in the unemployment rate in the

Portuguese economy (Table 4.1 and Chart 4.1). In parallel with these developments, there was an in-

crease in the share of long-term unemployment,1

whose levels are now higher than in the correspond-

ing phase of the previous business cycle (Chart 4.2). The behaviour of employment remained in line

with developments in the cyclical position of the Portuguese economy, with an increase in productivity

per employee of only 0.3 per cent (1.0 per cent in 2004) (Chart 4.3). Despite the rise in the unemploy-

ment rate, compensation per employee increased at a rate close to that recorded in the previous year

(Chart 4.4). In this context, unit labour costs (ULC) accelerated significantly in 2005, and their growth

differential vis-à-vis the euro area widened.


Employment and Wages | Chapter 4

91

Table 4.1

POPULATION, EMPLOYMENT, UNEMPLOYMENT AND WAGES

Year-on-year rate of change, unless otherwise indicated

Per cent

2001 2002 2003 2004 2005

Population 0.7 0.7 0.8 0.6 0.5

Labour force 1.9 1.6 1.0 0.5 1.0

Participation rate of population aged 15-64 (per cent) 72.0 72.6 72.8 72.9 73.4

Total employment (Labour Force Survey) 1.8 0.5 -0.4 0.1 0.0

Unemployment rate (per cent) 4.0 5.0 6.3 6.7 7.6

Long-term unemployment (as a percentage of total unemployment) 40.0 37.3 37.7 46.2 49.9

Compensation per employee in Portugal – total economy(a) 4.3 3.0 2,2 (1,8) 2,3 (2,8) 3,0

Compensation per employee in Portugal – private sector(a) 3.9 2.7 2,6 (2,0) 2,5 (3,2) 3,2

Productivity per employee in Portugal 0.5 0.3 -0.8 1.0 0.3

Unit labour costs in Portugal – total economy(a) 3.8 2.8 3,0 (2,6) 1,3 (1,8) 2,7

Unit labour costs in the euro area – total economy 2.6 2.6 2.2 2.2 1.7

Productivity per employee in the euro area 0.5 0.3 0.4 1.2 0.6

Unit labour costs in the euro area – total economy 2.1 2.3 1.8 1.0 1.1

Sources: INE (Labour Force Survey) and Banco de Portugal.

Note: (a) Compensation gross of contributions and taxes on income and excluding State transfers to Caixa Geral de Aposentações; figures in brackets are adjusted for the direct effects

of the securitisation of tax arrears in 2003.

(1) A long-term unemployed is an individual seeking work for a period of more than 12 months.

The results of the Labour Force Survey of INE for 2005 reveal the maintenance of the trend of stagna-

tion in total employment observed in the period from 2002 to 2004. In qualitative terms, in 2005 devel-

opments in employment by employment status were similar to those recorded in 2004, with an

increase in employees that counterbalanced the fall in other forms of employment (Table 4.2). By con-

trast, the breakdown of the growth of employees by type of employment contract in 2005 reveals differ-

ences compared with the previous year. These can be justified by the deterioration of both economic

conditions and employers’ expectations. Fixed-term contracts and contracts for services increased by

2.1 per cent compared with a 0.8 per cent decline in 2004; the number of employees with permanent

employment contract increased by 1.3 per cent (a 0.9 p.p. deceleration from 2004).


Chapter 4 | Employment and Wages

92

Chart 4.1

OUTPUT GAP AND UNEMPLOYMENT RATE

3

4

5

6

7

8

-5.0 -2.5 0.0 2.5 5.0

Output gap (per cent)

Un

em

plo

ym

en

tra

te(p

er

ce

nt)

2003

2002

2001

2000

1999

1998

1997

1996

19951994

1993

1992 1991

2005

2004

Sources: INE Labour Force Survey and Banco de Portugal.

Chart 4.2

TOTAL AND LONG-TERM UNEMPLOYMENT

20

25

30

35

40

45

50

55

3 4 5 6 7 8 9

Unemployment rate (previous year)

Lo

ng

-te

rmu

ne

mp

loym

en

t

(cu

rre

ntye

ar)

2005

1988

2004

1991

1995

1986

2000


Note: Series break in 1992 and 1998.

Chart 4.3

PRIVATE GDP AND PRIVATE EMPLOYMENT

GROWTH(a)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-2 0 2 4 6

Real change in private GDP (Per cent)

Ch

an

ge

inp

riva

tee

mp

loym

en

t(p

er

ce

nt)

1993

1998

1999 1996

1997

2000

2005

2002

2004

1994

1992

19911995

2001

2003


Nota: (a) Private employment is defined as total employment less public sector employ-

ment; private GDP is defined as total GDP less compensation of employees and general

government fixed capital consumption. Private employment and GDP series do not

include corporate hospitals.

Chart 4.4

UNEMPLOYMENT RATE AND REAL WAGES IN THE

PRIVATE SECTOR

-4

-2

0

2

4

6

8

10

3 4 5 6 7 8

Unemployment rate (per cent)

Wa

ge

sin

the

priva

tese

cto

r

(Ra

teo

fch

an

ge

,p

er

ce

nt) 1991

2005

1995

20002004


Note: Series break in 1992 and 1998.

Turning to employment by sector of activity, in 2005 employment continued to increase in the services

sector (1.4 per cent) and to decline in manufacturing industry (3.4 per cent) (Chart 4.5). In fact, employ-

ment creation in services has partially offset employment loss in the traditional sectors of manufactur-

ing; otherwise, the rise in the unemployment rate would have been more marked. The fall in

employment in manufacturing cannot be decoupled from the restructuring of the economy in response

to changes in the international trade pattern, which implies the destruction of employment in sectors

exposed to competition from low-cost producers. In parallel, the success of the restructuring process

requires employment creation in the private sector and in activities with fast-growing demand markets

and productivity levels above the average of the economy (see “Section 3 of Chapter 2 Structural is-

sues”). However, the growth of employment in services in 2005 resulted chiefly from the strong contri-

bution of employment in the general government, defence and compulsory social security (0.5 p.p.)

and in the education and health sectors2

(0.3 and 0.5 p.p. respectively). Employment in the



93

Table 4.2

BREAKDOWN OF EMPLOYMENT BY EMPLOYMENT STATUS AND BY TYPE OF CONTRACT

Rate of change

Per cent

2001 2002 2003 2004 2005

Employees 1.7 1.0 -0.3 1.2 0.8

Permanent contract 1.2 -0.5 0.9 2.2 1.3

Other contracts(a)

10.2 6.6 -4.3 -0.8 2.1

Other dependent labour(b)

-18.1 7.7 -5.9 -9.4 -16.3

Self-employed 7.2 1.2 -0.2 -4.5 -0.7

Employers 5.1 0.5 2.7 1.1 -8.6

Unpaid family worker and others -12.1 -9.4 -14.6 -5.5 -2.5

Other -47.8 -37.5 -2.4 8.9 19.2

Source: INE (Labour Force Survey).

Notes: (a) Includes fixed-term contracts and contracts for services. (b) Includes seasonal work and occasional work.

Chart 4.5

CONTRIBUTIONS TO TOTAL EMPLOYMENT

GROWTH BY SECTOR

0.00.1

-0.4

0.5

1.8

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005

Inperc

enta

ge

poin

ts

Agriculture and fishing Manufacturing industryConstruction ServicesTotal


(2) The education and health sectors include private and public employment.

construction sector increased by 1.1 per cent, after falling by 5.6 and 6.1 per cent in 2003 and 2004

respectively.

Average working hours stood at 39.2 hours per week in 2005, remaining virtually unchanged from the

previous two years (Table 4.3). This seems to confirm the end of the trend decline in working hours ob-

served since the end of the 1990s. Average working hours are close to the legal maximum of 40 hours

established by Portuguese legislation since 1996, albeit resulting from quite different situations. On the

one hand, average working hours are affected by the share of part-time employment, which is quite

stable in Portugal, accounting for around 11 per cent of total employment. The share of part-time em-

ployment in Portugal is low compared with the European Union average (approximately 17 per cent in

2004). This results chiefly from the fact that in Portugal women’s participation in the labour market is

essentially on a full-time basis. Moreover, the low share of part-time employment results from the weak

link to the labour market of some population groups, such as students and older persons.3

In the latter

age group, the increase in the statutory retirement age, associated with the need to contain pension

expenditure, may lead to an increase in part-time employment. This allows for the compatibility of pref-

erences between leisure and income and the productivity levels of these employees and corporate

needs. Average working hours are also affected by overtime. According to the results of the Labour

Force Survey, in 2005 approximately 17 per cent of men and 9 per cent of women worked more than 45

hours per week.

The analysis of the quarterly transitions between the different labour market states in 2005 reveals a

decrease in separations, excluding direct job-to-job movements, and an increase in net outflows from

inactivity (Table 4.4). Net flows between employment and inactivity remained unchanged from 2004.

However, it should be noted that gross flows of the transition between employment and inactivity have

declined since 2002, chiefly due to a deceleration in early retirements. On the other hand, gross flows

of the transition between inactivity and employment have also declined since 2002, as a result of de-

velopments in the cyclical position of the Portuguese economy. The positive net flows from employ-

ment into inactivity lead to a reduction in the participation rate, counterbalanced by a negative net flow

between unemployment and inactivity. This labour market dynamics is strengthened by demographic

factors associated with a reduction in the share of the youth in total population, which contributed

around 0.1 p.p. to a further increase in the participation rate in 2005. This effect was also strengthened

by a significant rise in the female participation rate (0.7 p.p.), reinforcing the trend seen in the past few



94

Table 4.3

EMPLOYMENT, HOURS WORKED AND AVERAGE WORKING HOURS

Year-on-year rates of change

Per cent

Total

employment(a)

Working hours(b)

Average

working hours

Average

working hours

(number of hours)

Share of part-time

workers

1999 1.9 0.8 -1.1 39.9 11.0

2000 2.3 1.7 -0.6 39.7 10.9

2001 1.5 0.9 -0.6 39.4 11.1

2002 0.5 0.6 0.1 39.5 11.3

2003 -0.4 -1.2 -0.8 39.2 11.7

2004 0.1 0.1 0.0 39.2 11.3

2005 0.0 0.1 0.1 39.2 11.2

Source: INE (National Accounts and Labour Force Survey).

Notes: (a) 1999-2003 National Accounts; 2004 and 2005 Labour Force Survey. (b) Usual number of hours worked.

(3) In 2005 the participation rates of the youth (aged 15 to 24 years) and of older persons (aged over 65) stood at 42.9 and 17.1 per cent respectively.

Em

plo

ymen

tan

dW

ages|

Chapter4

An

nual

Rep

ort

2005

|B

ancodePortugal

95

Table 4.4

QUARTERLY AVERAGE INFLOWS AND OUTFLOWS BETWEEN LABOUR MARKET STATES(a)

As a percentage of the labour force

2003 2004 2005

Q1 Q2 Q3 Q4 Average Q1 Q2 Q3 Q4 Average Q1 Q2 Q3 Q4 Average

Flows between employment and inactivity

Employment => Inactivity 1.74 1.57 1.32 1.43 1.51 1.61 1.10 1.27 1.16 1.29 1.13 0.98 1.04 0.91 1.02

Inactivity => Employment 1.61 1.35 1.35 1.23 1.39 1.35 1.08 1.20 1.17 1.20 0.94 1.02 0.92 0.83 0.93

Inflows into unemployment 2.61 2.07 2.32 2.54 2.39 1.96 1.94 2.28 2.29 2.12 2.18 1.94 2.65 2.37 2.28

Employment => Unemployment 1.31 1.00 0.99 1.15 1.11 0.96 0.83 0.91 1.16 0.97 1.01 0.79 1.02 1.06 0.97

Permanent 0.54 0.47 0.36 0.41 0.45 0.31 0.34 0.34 0.40 0.35 0.41 0.40 0.25 0.30 0.34

Fixed-term 0.53 0.35 0.40 0.52 0.45 0.37 0.28 0.38 0.52 0.39 0.39 0.20 0.51 0.47 0.39

Other 0.24 0.17 0.23 0.22 0.22 0.28 0.21 0.19 0.23 0.23 0.20 0.19 0.25 0.29 0.23

Inactivity => Unemployment 1.30 1.07 1.33 1.38 1.27 1.00 1.10 1.37 1.13 1.15 1.17 1.15 1.63 1.31 1.32

Outflows from unemployment 2.27 2.45 2.24 2.26 2.31 2.34 2.47 1.98 2.25 2.26 2.10 2.53 2.11 2.25 2.25

Unemployment => Employment 1.06 1.47 1.14 1.18 1.22 1.20 1.33 0.89 1.08 1.12 1.01 1.23 0.96 1.04 1.06

Permanent 0.17 0.24 0.11 0.21 0.18 0.21 0.18 0.14 0.14 0.17 0.13 0.22 0.16 0.18 0.17

Fixed-term 0.60 0.79 0.64 0.60 0.66 0.61 0.77 0.52 0.56 0.62 0.60 0.79 0.56 0.49 0.61

Other 0.29 0.44 0.40 0.37 0.37 0.38 0.38 0.22 0.38 0.34 0.28 0.22 0.25 0.36 0.28

Unemployment => Inactivity 1.21 0.98 1.09 1.08 1.09 1.14 1.14 1.09 1.17 1.14 1.09 1.30 1.15 1.22 1.19

Net inflows into unemployment 0.34 -0.38 0.08 0.28 0.08 -0.38 -0.53 0.30 0.04 -0.14 0.08 -0.59 0.54 0.12 0.04


Note: (a) Considering the common sample component of quarter T and quarter T-1, and using the population weights of quarter T.

years. Thus, the participation rate of individuals aged between 15 and 64 years increased by 0.5 p.p. in

2005, standing at 73.4 per cent in annual average terms.

The unemployment rate stood at 7.6 per cent in 2005, a 0.9 p.p. rise from 2004, reaching 8 per cent at

the end of the year. Similarly to 2004, the change in the male unemployment rate was similar to that of

the female unemployment rate, with a simultaneous increase in youth unemployment, which reached

16.1 per cent in 2005 (Table 4.5). In this age group, the unemployment rate is far higher in individuals

with higher educational qualifications (college degree), but for whom unemployment duration is tradi-

tionally quite reduced.4

The analysis of the breakdown of unemployed persons by reasons for job

seeking reveals that collective dismissals and company closures have increased their share in the un-

employed structure (from 13.9 per cent in 2001 to 19.5 per cent in 2005) (Table 4.6). This also reveals

the prevalence of a restructuring process in productive activity in response to the changes in the inter-

national competitive environment. The share of employment contract terminations by mutual agree-

ment has grown steadily since 2001, but the expiry of fixed-term contracts continues to be the most

common reason behind unemployment (23.4 per cent).

Developments in the unemployment rate in 2005 seem to have been more affected by an increase in

the duration of unemployment than by a higher flow of new unemployed. In fact, in 2005 the duration of



96

Table 4.5

YOUTH UNEMPLOYMENT RATE BY LEVEL OF EDUCATION (AGED 15-24)

Per cent

2001 2002 2003 2004 2005

Structure

Youth unemployment rate 9.4 11.6 14.5 15.3 16.1

Education level

Basic schooling 1st and 2nd levels 8.0 11.2 13.5 17.6 19.3 33.3

Basic schooling 3rd level 9.9 11.4 13.4 13.4 12.9 34.1

Secondary schooling 9.3 9.8 14.2 13.5 15.3 22.1

College-level schooling 13.4 17.3 23.8 20.5 23.7 9.9


Table 4.6

BREAKDOWN OF THE STOCK OF UNEMPLOYED PERSONS BY REASONS FOR JOB SEEKING

Per cent of total

2001 2002 2003 2004 2005

First-job seekers 16.0 15.2 13.5 13.4 13.9

Collective dismissal and firm closure 13.9 12.7 13.0 16.8 19.5

Individual dismissal 14.0 16.0 19.6 20.0 18.3

Expiry of a fixed-term contract 27.9 27.7 26.1 24.1 23.4

Termination by mutual agreement 8.5 8.8 9.9 10.9 11.8

Other reasons 19.7 19.6 17.9 14.8 13.2

Total 100 100 100 100 100


(4) In addition, the strong private return associated with this education level should be emphasised. See Portugal, P. (2004), “Myths and facts regarding the

Portuguese labour market and the tragic fate of collage graduates”, in the March 2004 issue of the Economic Bulletin of Banco de Portugal.

unemployment increased further compared with 2004, reaching an average value of 21.1 months (Ta-

ble 4.7). On the other hand, long-term unemployment, which measures the proportion of the unem-

ployed for more than one year, increased by 3.7 p.p. from 2004, standing at 49.9 per cent. Long-term

unemployment tends to increase in periods of weak economic growth and sectoral restructuring, as a

result of the depreciation and inadequacy of the professional skills of the unemployed as regards new

job offers. This is particularly relevant in a population with low education level. However, unfavourable

developments in long-term unemployment seem to be also associated with the changes introduced in

1999 and 2003 in the unemployment benefit system,5

which made eligibility easier, lengthened the

benefit periods and created a monetary incentive to long-term unemployment in the period immedi-

ately before the granting of a retirement pension (see “Box 2.5 Work incentives and the generosity of

unemployment benefits”).

The number of individuals receiving unemployment benefits increased by 3 per cent in 2005, com-

pared with 18 per cent in 2004 (Chart 4.6). It should be noted that the universe of unemployment bene-

fit recipients does not coincide with that of the unemployed identified in the Labour Force Survey, either

because the latter do not fulfil the eligibility conditions, or because the maximum period for the granting

of unemployment benefits has expired. Expenditure on unemployment benefits, which depends on the

amount of the benefit and on the number of individuals receiving it, increased by 8.5 per cent,

corresponding to a 3.3 p.p. deceleration from 2004.

In 2005 the unemployment rate increased in all the regions of the country with the exception of Alentejo

(Chart 4.7). Alentejo is precisely the region with the highest unemployment rate at national level (9.1

per cent), followed by the North (8.8 per cent). In this regard, it should be noted that the strong growth

of the unemployment rate over the past few years in the North has corresponded to approximately 4

p.p. since 2002. This situation is related to the fall of employment in manufacturing industry, which is

the sector with the strongest weight in this region. It should be noted that the regional dispersion of the

unemployment rates is affected by labour market distortions, namely in terms of obstacles to mobility.

In this context, in Portugal the coefficient of variation of the regional unemployment rates, weighted for

the population in each region, is close to the European Union average.



97

Table 4.7

LABOUR MOBILITY

Employed Unemployed

Average tenure in the job Long-term employment(a)

Average duration of unemployment

Months r.c. Percentage p.p.c. Months r.c.

1999 118.9 1.1 45.2 0.6 19.4 -11.2

2000 117.8 -0.9 45.3 0.1 20.6 6.1

2001 116.8 -0.9 44.6 -0.7 18.2 -11.8

2002 117.8 0.9 44.9 0.2 17.6 -3.2

2003 121.4 3.1 44.9 0.0 16.2 -8.3

2004 124.6 2.6 45.5 0.6 19.7 22.1

2005 126.9 1.9 46.2 0.6 21.1 6.9


Notes: r.c. – percentage rate of change. p.p.c.: change in percentage points. (a) Share of employees aged 45 or over whose job tenure is equal to 20 years or over.

(5) See Pereira, A. (2006), “Assessment of the changes in the Portuguese Unemployment Insurance System”, Economic Bulletin, Spring, Banco de Portugal.55

4.3. Wages

Banco de Portugal estimates point to a 3 per cent change in nominal compensation per employee for

the total economy in 2005.6

In the current context of the Portuguese labour market, the non-deceler-

ation of wages differs from previous business cycles, indicating wage rigidity and difficulties in adjust-

ment to the new macroeconomic environment resulting from participation in the euro area.7

The

behaviour of wages at macroeconomic level may be also affected by workforce composition effects

that counter the typical cyclical effects. In fact, as the loss of employment occurs predominantly among

employees with lower wages, the rise in unemployment may be accompanied by an increase in the av-

erage wage of the economy, although new employment contracts are associated with lower wages.8

Average wages negotiated under the collective labour agreements of the private sector increased by

2.6 per cent in nominal terms in 2005 in a universe of approximately one million employees covered.

This accounted for a substantial increase in the representativeness of this indicator compared with

2004.9

Compensation per employee in the general government increased 2.3 per cent in 2005 (exclud-

ing the State transfers to Caixa Geral de Aposentações). This figure corresponds to the average wage

scale update, thereby translating into a zero wage drift (see “Section 3 of Chapter 6 Current

expenditure”).

In 2005 productivity per employee maintained a low trend growth, standing slightly below the growth of

real wages (0.7 per cent) (Chart 4.8). Unfavourable developments in productivity and the rise in com-

pensation per employee had a significant impact on ULC in the total economy, which increased by 2.7

per cent in 2005, i.e. 1.6 p.p. more than in the euro area (Chart 4.9).



98

Chart 4.6

DEVELOPMENTS IN TOTAL, SUBSIDISED AND

REGISTERED UNEMPLOYMENT

Rate of change

-15

-10

-5

0

5

10

15

20

25

30

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Unemployment

Subsidised unemployment

Registered unemployment

Sources: INE – Labour Force Survey (total unemployment), IEFP (registered unemploy-

ment) and Instituto de Informática e Estatística da Segurança Social (subsidised unem-

ployment).

Chart 4.7

UNEMPLOYMENT RATE BY REGIONS

0

2

4

6

8

10

12

Alg

arv

e

Ale

nte

jo

Lis

bo

na

nd

Ta

gu

s´

Va

lley

Ce

nte

r

No

rth

Azo

res

Ma

de

ira

Po

rtu

ga

l

Pe

rce

nt

2002 2003 2004 2005


(6) Average compensation per employee, gross of contributions and taxes on income, adjusted for the effect of the securitisation of tax arrears that took place in

2003. Social contributions used in the calculation of compensation per employee do not include State transfers to Caixa Geral de Aposentações.666

(7) See Box 2.5 “Nominal and real wage rigidity: a microeconomic approach”, in the 2004 issue of the Annual Report of Banco de Portugal.

(8) It should also be noted that the behaviour of productivity may be also positively affected by composition effects, due to the closing down of less productive

companies. Therefore, changes in ULC will tend to be less affected by the composition effects.

(9) In 2003 the number of employees covered by collective labour regulations totalled 1,474.4 thousand, having declined to 617.4 thousand in 2004, due to

difficulty in concluding wage negotiations. In 2005 the number of employees covered by these regulations totalled 1,005.8 thousand.



99

Chart 4.8

DIFFERENTIAL BETWEEN REAL WAGE AND

PRODUCTIVITY GROWTH

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1987 1990 1993 1996 1999 2002 2005

Inp

erc

en

tag

ep

oin

ts


Note: A positive (negative) figure means that real wages increase more (less) than pro-

ductivity.

Chart 4.9

UNIT LABOUR COSTS IN THE TOTAL ECONOMY(a)

Rate of change

-2

-1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005

Pe

rce

nt

Compensation pper employee

Productivity

Unit labour costs


Note: (a) Excluding State transfers to Caixa Geral de Aposentações.

5. PRICES

Inflation, as measured by the annual average rate of change in the HICP, dropped for the fourth con-

secutive year in 2005, standing at 2.1 per cent (2.5 per cent in 2004). Cyclical developments in the Por-

tuguese economy and the behaviour of import prices excluding fuels fostered the deceleration in

prices. In addition, the reduction in average inflation was also due to the unwinding of the effects from

the European Football Championship in June 2004, which was more strongly felt in services prices.1

However, inflation tracked upwards in the second half of the year, mainly reflecting adverse develop-

ments in international oil prices and the rise in the standard VAT rate from 19 to 21 per cent, whose im-

pact was nonetheless lower than expected (Chart 5.1). Indeed, against a background of unfavourable

demand prospects, companies seem to have accepted some squeeze in their profit margin, only partly

passing through the VAT increase to consumer prices.

Energy prices accelerated as a result of the oil price hike, increasing by 10 per cent in 2005 (Table 5.1).

This behaviour was broadly based across the euro area. Despite the very significant growth of energy

prices, inflation has remained reasonably subdued. Typically, there is a one- to two-year lag in the

pass-through of changes in energy prices to the remaining prices in the economy.2

However, and un-

der the current circumstances, several factors have contributed to contain pressures on prices and

may also affect the transmission of changes in energy prices. In addition to the cyclical position of the

economy, which is likely to have had a greater impact on developments in services prices, the favour-

able behaviour of import prices excluding fuels associated with the growing integration of low-cost pro-

ducers in the world economy should also be emphasised. Moreover, in the specific case of the

Portuguese economy, the import component of price increases is significantly influenced by the fact

that inflation expectations in the euro area are well-anchored in the context of the ECB’s policy of

maintaining price stability.


Prices | Chapter 5

101

Chart 5.1

HARMONISED INDEX OF CONSUMER PRICES

2.5

4.4

3.7

3.3

0

1

2

3

4

5

6

2001 2002 2003 2004 2005

Per

cent


Annual average rate of change

2.1

Source: Eurostat.

(1) This phenomenon of reversal of price increases for a number of services was less marked in the CPI than in the HICP, due to differences in the weighting

structure used to aggregate elementary price indices. Therefore, unlike 2004, the annual average inflation rate as measured by the CPI stood slightly above

the HICP rate (0.2 p.p.). The difference between both indices was particularly noticeable in June, when the year-on-year rate of change of the HICP fell to a

trough of 0.6 per cent, standing 1 p.p. below the rate for the CPI.

(2) For more details, see Marques, C. R., Neves, P. D. and Sarmento, L. M. (1999), “Evaluating core inflation indicators”, Economic Bulletin, December, Banco

de Portugal.222222222

The very strong growth of major developing economies, namely in Asia, has contributed to the fairly

high increase in oil prices. However, the growing participation of these low-cost producers in the world

market has also translated into a decline in import prices of different types of consumer goods. This

has helped counter the impact of rising energy prices on consumer prices. Banco de Portugal esti-

mates based on data provided by INE point to a 4.1 per cent increase in the price of imported goods,

which stands at only 0.5 per cent when excluding fuels, reflecting a decline in the prices of imported

consumer goods for the fourth consecutive year. Favourable developments in import prices excluding

fuels, which are also linked to lagged effects of the accumulated appreciation of the euro in 2001-2004,

continued to contribute to a further increase in the rate of import penetration, thus helping to contain

pressures on the prices of goods, particularly in the non-energy industrial goods component (Table

5.2).


Chapter 5 | Prices

102

Table 5.1

HICP – MAIN CLASSES AND AGGREGATES

Rate of change

Per cent

Weights in 2005 2001 2002 2003 2004 2005

Total 100.0 4.4 3.7 3.3 2.5 2.1

Total excluding unprocessed food and

energy

80.6 3.6 4.5 3.3 2.6 1.7

Goods 61.9 4.2 2.4 2.4 1.6 1.9

Food 21.5 6.1 1.9 2.6 1.4 0.1

Unprocessed 10.9 8.9 0.2 2.1 0.0 -0.5

Processed 10.7 3.1 3.8 3.1 2.8 0.8

Industrial 40.3 3.1 2.7 2.4 1.8 2.8

Non-energy 31.8 2.5 3.1 1.8 0.8 1.0

Energy 8.5 5.2 1.2 4.9 5.4 10.0

Services 38.1 4.7 5.9 4.6 3.9 2.5

Memo:

IPC(a)

- 4.4 3.6 3.3 2.4 2.3


Note: (a) Up to December 2002, the rates of change were calculated using the 1997-based CPI. From January 2003 onwards, the rates of change are calculated using the new

2002-based CPI.

Table 5.2

PORTUGAL – MAIN INTERNATIONAL PRICE INDICATORS

Rate of change

Per cent

2001 2002 2003 2004 2005

Import prices of goods(a)

Total -0.1 -2.4 -2.5 2.1 4.1

Total excluding fuels 0.7 -1.8 -3.4 0.7 0.5

Consumer goods 3.6 -1.7 -3.3 -1.7 -1.6

International commodity prices

Oil prices (Brent Blend), EUR -9.8 -4.9 -5.0 21.4 45.0

Non-energy commodity prices, EUR -8.1 -0.9 -4.5 10.8 9.4

Memo:

Nominal effective exchange rate index for

Portugal(b)

0.3 0.6 2.6 0.6 -0.2

Sources: Eurostat, HWWA, INE, Thomson Financial Datastream and Banco de Portugal.

Notes: (a) Banco de Portugal calculations based on information provided by INE. The classification by broad economic categories shown in this table differs from that used by INE, given

that light passenger vehicles are included in consumer goods rather than equipment goods. (b) A positive change denotes an appreciation of the index. For a detailed description of the

methodology, see Gouveia, A. C. and Coimbra, C. (2004), “New effective exchange rate index for the Portuguese economy”, Economic Bulletin, December, Banco de Portugal.

The behaviour of prices in 2005 was also influenced by domestic conditions in the Portuguese econ-

omy, which have contributed to contain inflationary pressures, namely in the services sector. As a re-

sult of low economic growth, associated with the slowdown in domestic demand, there were no

significant price pressures on the demand side. Moreover, according to Banco de Portugal estimates

and in contrast to the increase in 2004, wage growth was virtually stable in 2005.

Against a background of a strong deceleration in services prices and a slight acceleration in non-en-

ergy industrial prices, which seem to have been more significantly affected by the increase in the stan-

dard VAT rate, the average growth differential between prices of both aggregates narrowed markedly

from 3.1 p.p. in 2004 to 1.5 p.p. in 2005 (Chart 5.2).

The deceleration in prices in Portugal translated into a virtually nil inflation differential vis-à-vis the euro

area in 2005 (Chart 5.3). The downward trend of the differential started in 2002 was pursued in 2005.

The lower average inflation differential mainly reflects the narrowing of the inflation differential in the

services sector from 1.3 to 0.2 p.p. Conversely, the inflation differential in non-energy industrial goods

widened by 0.7 p.p., reflecting both the deceleration in prices of this component in the euro area and its

acceleration in Portugal, which mainly mirrors changes in taxes and benefits (which in the Portuguese

case affected prices in 2005 and in the euro area affected inflation in the year before).


Prices | Chapter 5

103

Chart 5.2

HICP – NON-ENERGY INDUSTRIAL GOODS AND

SERVICES


-1

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005

Pe

rce

nt

Differential (p.p.)Non-energy industrial goodsServices

Source: Eurostat.


Chapter 5 | Prices

104

Chart 5.3

INFLATION DIFFERENTIAL VIS-À-VIS THE EURO AREA

Year-on-year rate of change of the HICP

Total

-2

-1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005

Per

cent

Energy

-16

-12

-8

-4

0

4

8

12

16

2000 2001 2002 2003 2004 2005

Per

cent

Non-energy industrial goods

-1

0

1

2

3

4

2000 2001 2002 2003 2004 2005

Per

cent

Services

-3

-2

-1

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005

Per

cent

Source: Eurostat.

Differential (p.p.) HICP - Portugal HICP - euro area

6. PUBLIC FINANCES1,2

6.1. Overview

The general government deficit, on a national accounts basis, stood at 6.0 per cent of GDP in 2005

(Table 6.1), i.e. significantly above the value recorded in the previous year (3.2 per cent). This chiefly

reflects the end of the recourse to significant temporary measures, adopted in the 2002-2004 period,

with the purpose of keeping the deficit below the reference value of 3 per cent of GDP. The general

government balance excluding the effect of temporary measures worsened by 0.7 p.p. of GDP.

In 2005 the cyclical component of the fiscal balance deteriorated slightly (by around 0.1 p.p of GDP).

Given that the ratio of interest expenditure to GDP rose only slightly, the primary balance adjusted for

the cycle and for the effects of temporary measures (underlying primary balance), the indicator com-

monly used to assess the fiscal policy stance, declined by around 0.5 p.p. of GDP. The decline in the

underlying primary balance stemmed from the substantial growth of primary current expenditure

(whose contribution amounted to approximately -1.5 p.p. of GDP), in particular of transfers to house-

holds, partly offset by the increase in current revenue (with a contribution of around 1 p.p. of GDP).

This was especially due to the behaviour of taxes on production and imports (see “Box 6.1 A

disaggregated framework for the analysis of public finances”).

The debt ratio reached 64 per cent at the end of 2005, i.e. 5.4 p.p. above the value recorded one year

before, thereby maintaining the upward trend that had started in 2000. This change chiefly reflects the

high primary deficit, in a context of absence of temporary measures, the effect of the positive differen-

tial between the implicit interest rate on government debt and the nominal GDP growth rate, as well as

the contribution from deficit-debt adjustments to debt increase.


Public Finances | Chapter 6

105

Table 6.1

MAIN FISCAL INDICATORS


2003 2004 2005

Overall balance -2.9 -3.2 -6.0

Overall balance adjusted for temporary measures -5.3 -5.3 -6.0

Primary balance -0.2 -0.5 -3.3

Primary balance adjusted for temporary measures -2.5 -2.7 -3.3

Underlying balance(a)

-4.8 -4.8 -5.4

Underlying primary balance -2.0 -2.2 -2.7

Underlying primary balance change 0.0 -0.1 -0.5

Public debt 56.9 58.6 64.0


Note: (a) The underlying balance corresponds to the balance adjusted for the cycle and for the effects of temporary measures.

(1) For a medium-term assessment of budgetary developments in Portugal in the context of the European Union, see “Section 2.2 Fiscal policy”. 11111111111

(2) The general government accounts used in the elaboration of this Chapter correspond to those reported in the March 2006 excessive deficit procedure

notification. They are compiled on a national accounts basis, according to the methodology of the European System of Accounts (ESA 95), except as

regards the treatment of swaps and forward rate agreements, which are considered as non-financial transactions, and as such have an impact on interest

expenditure and the deficit. In 2005 the net effect of these transactions increased interest expenditure by EUR 68.3 million. General government debt

statistics are also compiled within the framework of the excessive deficit procedure and follow ESA 95 methodology as regards the delimitation of the

general government sector and the definition of financial instruments. However, debt valuation is recorded at nominal value, instead of market value. GDP

figures used in the calculation of ratios are the estimates of Banco de Portugal shown in “Chapter 3Output, Expenditure and External Accounts”.22222222222

6.2. Current Revenue

Current revenue grew significantly in 2005 (5.2 per cent), again in line with a sharp rise in tax revenue

(6.0 per cent), which translated into an increase in this item by 1.1 p.p. as a ratio to GDP (Table 6.2).

This occurred notwithstanding the deterioration in the cyclical position and was mainly due to an im-

provement in the tax collection procedures, whose effect is estimated to be close to 1 per cent of GDP

(see “Box 6.1 A disaggregated framework for the analysis of public finances”). In addition, there were

discretionary measures increasing indirect taxes, implemented as from the middle of the year, with an

effect of approximately 0.3 p.p. of GDP. However, tax revenue in 2005 was negatively affected by mea-

sures approved in previous years regarding taxes on income and wealth.

The ratio of revenue from taxes on income and wealth to GDP remained virtually unchanged. Taxes on

households grew by 5.3 per cent, i.e. above the estimate for the change in the wage bill, despite the cut

in the personal income tax (IRS) rates in the State Budget for 2005, already partially felt in the course of

the year, through the update of the withholding tables. Revenue from corporate taxes fell by 1.9 per

cent, reflecting the impact of the cut in the corporate income tax (IRC) rate from 30 per cent to 25 per

cent, approved in the State Budget for 2004, via the balance of payments relating to the previous year.

However, the behaviour of IRC revenue was far more favourable than initially forecast, to the extent

that it benefited from greater effectiveness in its collection.

In 2005 the ratio of the revenue from taxes on production and imports to GDP grew quite strongly (1.0

p.p. increase). This was predominantly due to developments in the value added tax (VAT), which went

up by 12.7 per cent, i.e. clearly above the increase in private consumption, reflecting the combined ef-

fect of the rise in the standard rate of VAT from 19 to 21 per cent, as from July, along with measures to

fight tax evasion and fraud. With regard to the remaining taxes on production and imports, the State

revenue from the tax on oil products (ISP) grew by only 0.3 per cent, despite the average increase in

unit tax rates by 1.5 per cent for diesel and by 1.3 per cent for petrol. This outcome stemmed from a

quantity effect, since there was a fall in the consumption of petrol and diesel. In turn, the State revenue


Chapter 6 | Public Finances

106

Table 6.2

GENERAL GOVERNMENT CURRENT REVENUE


Structure


Growth rates

per cent

2003 2004 2005 2004 2005

Current revenue 38.6 39.6 40.5 6.2 5.2

Tax revenue 34.3 35.3 36.4 6.8 6.0

Taxes on income and wealth 8.2 8.7 8.7 9.5 2.7

Taxes on households 5.5 5.5 5.6 3.8 5.3

Taxes on corporations 2.7 3.2 3.0 20.9 -1.9

Taxes on production and imports 14.1 14.3 15.3 5.1 10.0

of which:

Value added tax 7.8 7.9 8.7 5.0 12.7

Tax on oil products 2.3 2.2 2.1 0.6 0.3

Car tax 0.7 0.8 0.8 13.8 4.7

Social contributions 12.0 12.4 12.5 6.8 3.7

Actual 10.9 11.3 11.3 7.6 3.1

General social security scheme 7.4 7.5 7.5 4.9 3.1

Civil servants’ scheme 3.4 3.8 3.8 13.5 3.1

Imputed 1.1 1.1 1.2 -0.5 9.3

Sales of goods and services 2.4 2.4 2.5 3.6 5.1

Other current revenue 1.9 1.9 1.6 -0.1 -9.2


from the car tax recorded a 4.7 per cent change, associated with the performance of the sales of pas-

senger cars and the update of the tax tables. The rise in the State revenue from the tobacco tax (3.5

per cent) was caused by the increase in the unit component of the tax on cigarettes by 8.8 per cent in

the Budget for 2005. On a national accounts basis, revenue from this tax was negatively influenced by

the strong effect of the early introduction of tobacco products in the market at the end of 2004, with im-

pact on the January 2005 revenue, which did not repeat at the end of this year.3

Finally, local govern-

ment property tax revenue continued to grow significantly (7.7 per cent), which can be explained by the

gradual update of the values of residential buildings for tax purposes, within the framework of the

property tax reform at the end of 2003.

In 2005 revenue from social contributions remained virtually stable as a percentage of GDP, compared

to the previous year. Actual contributions to the general social security scheme grew by 3.1 per cent.

However, this change was negatively influenced by the inclusion in 2004, in the national accounts, of

€181.8 million relating to the payment of State debt to social security concerning contributions on be-

half of small farmers due between 2001 and 2003, and already included in the expenditure of these

years. Correcting for this effect, the change in social contributions to the general social security

scheme amounted to 5.0 per cent, i.e. above the change estimated for the private sector wage bill. So-

cial contributions to the civil servants’ scheme (Caixa Geral de Aposentações – CGA), which include

transfers made by the State4, grew by 3.1 per cent in 2005, i.e. quite less than in the most recent years.

These developments reflect the fact that CGA benefited from alternative financing sources intended to

balance the system, namely the earmarking of part of the VAT’s additional revenue resulting from the

already mentioned change in the standard rate and from the settlement of debts by the Cofre dos

Conservadores, Notários e Funcionários da Justiça (Fund for Registrars, Notaries and Officers of the

Ministry of Justice), within the scope of the Supplementary Budget for 2005. The substantial change in

imputed contributions in 2005 (9.3 per cent) is related in particular to the increase in expenditure of the

civil servants’ healthcare subsystems.

Sales of goods and services grew sharply, while other current revenue fell substantially, reflecting in

particular the strong decline in dividends received (71.9 per cent).

6.3. Current Expenditure5

Primary current expenditure grew strongly in 2005 (6.8 per cent). This behaviour was broadly based

across the various components, in particular current transfers to households, which increased by 8.9

per cent, thereby implying a 1 p.p. hike in this item as a percentage of GDP (Table 6.3). Developments

in primary current expenditure were only partly affected by the restraint measures taken in 2005, since

these entered into force already in the second half of the year, such as the freeze of automatic progres-

sion in public administration careers and the revision of the rules regarding the reimbursement of med-

icines. The impact of the reform of the civil servants’ pension scheme will be gradually felt as from

2006.

Compensation of employees as a whole decelerated slightly in 2005, recording a 3.9 per cent increase

(4.9 per cent in 2004). However, this result was strongly influenced by lower growth in State transfers to



107

(3) The tobacco tax is recorded in the national accounts on a time-adjusted cash basis with a lag of one month, which explains the fact that in 2005 the revenue

growth rate in the public accounts (28.8 per cent) was much higher than that in the national accounts.

(4) State transfers to CGA are aimed at ensuring the financial balance of the civil servants’ pension scheme. When the CGA does not receive extraordinary

proceeds, these transfers are approximately equivalent to the difference between expenditure related to social benefits (mostly pensions) and social

contributions (of civil servants and others). In general government accounts, State transfers to CGA are simultaneously recorded as revenue from social

contributions and compensation of employees (employers’ social contributions).

(5) The values of the various current and capital expenditure items may still be significantly revised when 2005 general government final accounts are compiled.

CGA (3.6 per cent, after 22.2 per cent in 2004). In fact, the government wage bill increased by 3.4 per

cent, compared with 2.4 per cent in the previous year. This was explained by the more substantial up-

date of the wage scale and by the sharper increase in the number of civil servants, despite the opposite

effect of the freeze on automatic progression in careers as from the middle of the year.

In 2005 transfers to households in cash continued to grow at a very high rate (7.9 per cent, following

6.3 per cent in 2004). In particular, expenditure on pensions rose strongly again, both as regards the

general social security scheme (8.6 per cent6) and the civil servants’ scheme (7.9 per cent), causing,

as a whole, a 0.6 p.p. contribution to the rise in the ratio of primary current expenditure to GDP. Expen-

diture on CGA pensions in 2005 was affected by the beginning of the payment of pensions to retirees

from the public enterprises that transferred their pension liabilities to CGA at the end of 2004. Never-

theless, this expenditure decelerated vis-à-vis the previous year (1.6 p.p.) due to the fact that the

growth rate in 2004 was still influenced by the increase in retirement requests, in the wake of the

change in retirement rules announced in late 2002. Reference should also be made to the substantial

rise in the payment of unemployment benefits (8.5 per cent), which implied an increase of around 0.1

p.p. of their weight as a percentage of GDP.

The structural upward trend of old-age pensions expenditure is explained by both the increase in the

number of pensioners and by a composition effect. The increase in the number of pensioners receiving

old-age and survivors pensions in the general scheme, which amounted to 2.5 per cent in annual aver-

age terms in the 2001-2005 period, is associated with population ageing, worsened by the easing of

rules for early access to old-age pensions in 1999 and 2003. In the civil servants’ scheme, the number

of pension beneficiaries grew by 3.2 per cent on average in the same period, chiefly reflecting the age

structure of general government employees. This has been heightened by relatively more favourable

rules as regards the retirement age. The composition effect is due to the entry of new pensioners re-

ceiving higher average pensions than those already in the scheme, in particular when compared to the

pensions received by those who leave the scheme due to death. In the past five years, the contribution



108

Table 6.3

GENERAL GOVERNMENT CURRENT EXPENDITURE

Structure


Growth rates

per cent

2003 2004 2005 2004 2005

Current expenditure 41.4 41.8 43.4 4.6 6.7

Compensation of employees 14.2 14.4 14.5 4.9 3.9

Intermediate consumption 3.8 3.9 4.0 4.3 6.7

Interest on public debt 2.7 2.6 2.7 0.3 6.2


to households 16.9 17.0 18.0 4.2 8.9

in cash 13.8 14.1 14.8 6.3 7.9

of which:

unemployment benefits 1.1 1.2 1.2 11.6 8.5

general social security scheme pensions 6.6 6.9 7.2 8.2 8.6

civil servants’ pensions 3.4 3.6 3.7 9.5 7.9

in kind 3.1 2.8 3.2 -5.3 13.9

Subsidies 1.8 1.6 1.6 -11.2 4.8

Other transfers 1.9 2.3 2.5 29.1 10.6

Memo:

Primary current expenditure 38.7 39.1 40.7 4.9 6.8


(6) Increases in the payment of old-age, disability and survivors pensions of the general scheme amounted to 11.1, 0.6 and 4.1 per cent respectively.

of this composition effect to the growth in expenditure on pensions reached, on average, 3.9 and 4.4

p.p. in the general and the civil servants’ schemes respectively. These effects add to the annual up-

date, which in the most recent years has been influenced by phased extraordinary increases in the

lowest pensions. In the civil servants’ scheme these increases occurred between 2001 and 2004, while

in the general scheme they are taking place between 2003 and 2006.

Social transfers in kind rose by 13.9 per cent in 2005, thereby making a significant contribution to the

rise in the primary expenditure-to-GDP ratio. This rate is affected by one-off effects relating to the fi-

nancing of healthcare services provided by entities not belonging to general government and corpo-

rate entities of the regional healthcare services of the Autonomous Region of Madeira, and it may still

undergo a downward revision when a more final version of the accounts for 2004 and 2005 is com-

piled. Nevertheless, these developments also reflect a strong increase in the payment of services to

corporate hospitals (9.0 per cent). National Health Service expenditure on goods and services, exclud-

ing the payment of services to corporate hospitals, grew by 5.1 per cent, decelerating from the previ-

ous year, when it had grown by 9.5 per cent. This behaviour is partly associated with the impact of

measures regarding the market of medicines and their reimbursement rules taken in the middle of the

year.7

Other current transfers grew strongly in 2005 (10.6 per cent), to a large extent due to developments in

the financial contribution from the Portuguese State to the Community Budget, which included adjust-

ments relating to previous years brought about by the upward revision of the GNP level.

Interest expenditure grew by 6.2 per cent in 2005, interrupting the trend of stabilisation or even of some

decrease prevailing in recent years. This item went up slightly as a percentage of GDP (0.1 p.p.). Such

a result reflects the continued increase in the government debt stock in the past few years, with the im-

plicit interest rate remaining approximately constant in 2005.

6.4. Capital Revenue and Expenditure

The capital balance had an almost nil contribution to the change in the underlying primary balance in

2005 (Table 6.4). Indeed, after excluding transfers from the European Union on the revenue side and

the co-financed share of capital expenditure, the ratio of both capital revenue and expenditure to GDP

rose by around 0.1 p.p.



109

Table 6.4

GENERAL GOVERNMENT CAPITAL REVENUE AND EXPENDITURE


Structure


Growth rates

per cent

2003 2004 2005 2004 2005

Capital balance -2.5 -3.1 -3.1 - -

Capital revenue 1.8 1.4 1.4 -18.4 -0.4

Capital expenditure 4.3 4.5 4.5 9.7 2.7

GFCF 3.1 3.0 3.1 -0.8 4.8

Other capital expenditure(a)

1.1 1.5 1.5 38.6 -1.4


Note: (a) Includes capital transfers and the net acquisition of non-financial non-produced assets.

(7) The 10 per cent benefit in the reimbursement of generic medicines was abolished, the reimbursement of group A medicines was changed from 100 to 95 per

cent, and the price of reimbursed medicines and their commercial margins were both revised downwards by 3 per cent.

General government capital revenue excluding temporary measures declined slightly in 2005 (0.4 per

cent)8. This was chiefly accounted for by a 9.9 per cent reduction in transfers from the European Union,

as the implementation of the Third Community Support Framework approaches the end. The record-

ing of these transfers in the national accounts is made on an accrual basis, so that the deficit is not af-

fected by lags between the moment when expenditure is made by national authorities and the date of

the corresponding transfer by the European Union.

Capital expenditure grew by 2.7 per cent in 2005, i.e. below the increase in GFCF (4.8 per cent), given

that other capital expenditure fell by 1.4 per cent. The change in GFCF, however, is negatively influ-

enced by a greater disposal of real estate in 2005 in comparison with the previous year.9

Excluding this

effect, GFCF grew by 9.6 per cent, largely as a result of investment by the local government.

6.5. Government Debt

The government debt ratio stood at 64.0 per cent at the end of 2005, 5.4 p.p. more than one year be-

fore (Table 6.5, Chart 6.1 and Chart 6.2). The high primary deficit (3.3 per cent of GDP) contributed

strongly to these developments, as did the positive differential between the implicit interest rate on

government debt and the nominal GDP growth rate, and the deficit-debt adjustments. The overall

amount of deficit-debt adjustments reached 1.0 per cent of GDP, which means that the change in debt

exceeded the deficit to that amount (Table 6.6). This value essentially stemmed from transactions in li-

abilities not included in government debt, given the minor contribution from transactions in financial

assets and valuation effects.

The decline in liabilities not included in the government debt (1.2 p.p. of GDP) referred essentially to

the payment of expenditure from previous years, in particular National Health Service expenditure

through the Supplementary Budget for 2004, as well as of other outstanding amounts, namely relating

to relief grants on mortgage loan interest paid by households. With the opposite sign, reference should

be made to the liability arising from the increase in the GNP-based financial contribution to the Com-

munity Budget, recorded in 2005 but not yet paid.

The small increase in financial assets held by general government in 2005 (0.2 p.p. of GDP) was due

to transactions in the different instruments that nearly offset each other. First, reference should be

made to the reduction in short-term assets, due to the receipt by the CGA in the course of the year of



110

Table 6.5

BREAKDOWN OF THE CHANGE IN THE GENERAL GOVERNMENT DEBT RATIO


2001 2002 2003 2004 2005

Debt at the beginning of the year 50.5 52.9 55.5 56.9 58.6

(+) Primary deficit 1.3 0.0 0.2 0.5 3.3

(+) Contribution of interest payments 3.0 2.9 2.7 2.6 2.7

(-) GDP growth contribution -2.7 -2.4 -1.0 -2.0 -1.6

(+) Deficit-debt adjustments 0.9 2.2 -0.6 0.5 1.0

Debt at the end of the year 52.9 55.5 56.9 58.6 64.0


(8) Given that the effect of temporary measures in 2004 was concentrated on capital revenue, if such temporary measures had not been excluded, the decline

would have amounted to 60.3 per cent. These measures consisted in the transfer of assets from public enterprises to CGA, to the amount of €3051.5 million,

against the assumption by this entity of pension liabilities concerning employees covered by the respective pension funds.

(9) The sale of real estate is recorded as negative capital expenditure.

most of the remaining assets corresponding to the assumption of pension liabilities of public enter-

prises in 2004 (around €1160 million). This effect was partly offset, inter alia, by an increase in general

government deposits. With regard to the net acquisition of shares and other equity, in 2005 general

government received much lower proceeds from privatisations than in 2004. Capital injections into

public corporations not reclassified as capital transfers also stood well below the value recorded in the

previous year. In 2005 the most important transactions of this kind concerned equity injections into new

corporate hospitals (around EUR 285 million).



111

Chart 6.1 Chart 6.2

BREAKDOWN OF THE CHANGE IN THE GENERAL

GOVERNMENT DEBT RATIO

BREAKDOWN OF THE DEFICIT–DEBT

ADJUSTMENTS

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fG

DP

Primary deficit

Effect of interest net of output growth

Deficit-debt adjustments

Change in the debt ratio

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fG

DP

Privatisations

Equity increases

Change in other assets

Other adjustments

Sources: INE, Ministério das Finanças and Banco de Portugal. Sources: Ministério das Finanças and Banco de Portugal.

Table 6.6

GENERAL GOVERNMENT DEFICIT-DEBT ADJUSTMENTS


2001 2002 2003 2004 2005

General government deficit (EDP) (1) 4.3 2.9 2.9 3.2 6.0

Change in debt(a)

(2) 5.1 5.1 2.3 3.7 7.0

Deficit-debt adjustments (3)=(2)-(1)=(4)-(13)+(14)+(17) 0.9 2.2 -0.6 0.5 1.0

Transactions in assets (4)=(5)+(6)+(7)+(8)+(12) 0.3 2.2 -0.1 0.7 0.3

Currency and deposits (5) -1.4 1.2 -0.9 -0.1 0.6

Securities (6) 0.5 0.1 0.1 -0.1 0.3

Loans (7) 0.3 0.2 0.3 0.1 0.2

Shares and other equity (8)=(9)+(10)+(11) -0.1 0.6 0.3 -0.1 -0.3

Privatisations (9) -0.3 -0.3 0.0 -0.8 -0.3

Equity increases (10) 0.3 0.8 0.3 0.7 0.2

Other (11) 0.0 0.1 0.0 0.0 -0.2

Other short-term assets(b)

(12) 1.0 0.1 0.1 0.9 -0.5

Transactions in liabilities not included in government debt(c)

(13) -1.0 -0.4 0.2 -0.1 -1.2

Valuation effects in debt (14)=(15)+(16) -0.3 -0.2 -0.1 -0.2 -0.2

Exchange rates changes (15) 0.0 0.1 -0.1 0.0 0.0

Other valuation effects (16) -0.3 -0.2 0.0 -0.2 -0.2

Other debt-deficit adjustments (17) -0.1 -0.2 -0.1 0.0 -0.3


Notes: (a) The change in debt corresponds to (debtt-debtt-1)/GDPt. (b) Includes the difference between revenue recorded in national accounts and the amounts actually received in cash

and the change in advances from the Treasury for transfers to be received from the European Union to co-finance expenditure in the year. (c) Includes the difference between expendi-

ture recorded in national accounts and the amounts actually paid on a cash basis.

Debt valuation effects in 2005 were essentially related to the difference between interest considered in

the calculation of the deficit, on an accrual basis, and interest actually paid. Similarly to previous years,

this difference was negative, not only as regards interest on savings certificates, but also other debt

instruments.



112



113

Box 6.1. A Disaggregated Framework for the Analysis of Public Finances1

Public finances are influenced by a series of factors related to the macroeconomic environment, the legal and insti-

tutional context and policy decisions. The lack of standardised criteria to assess the impact of such heterogeneous

factors renders the analysis of fiscal developments less transparent and hinders comparisons among countries. A

disaggregated framework to the different revenue and expenditure components, in particular their structural

components, would facilitate this type of analysis.

In fact, most literature on fiscal policy analysis stresses the importance of some factors influencing public finances,

but it does not suggest an integrated analytical framework that enables their quantification, highlighting the effects

of discretionary policy changes. Such a methodology was presented in Kremer et al. (2006), and this box presents

its application to the Portuguese case, focusing in particular on the interpretation of fiscal developments in 2005.

In analytical terms, the methodology proposed is based on the analysis of the change in the ratio of each main rev-

enue and expenditure item to nominal trend GDP, excluding the transitional effects of the business cycle and tem-

porary measures. However, this adjustment cannot capture the impact of all non-permanent factors on the budget

balance. The following breakdown is made for each fiscal item X:

� � ��

E

Structural level Actual level

C

Cyclical component

� ��

� �MT

Effects of temporary measures

The calculation of the cyclical component is based on the methodology developed by the European System of

Central Banks (ESCB)2

that is being used by Banco de Portugal. This approach takes into account the cyclical im-

pact on the budget balance of different compositions of aggregate expenditure and national income. In fact, each

revenue and expenditure item admittedly influenced by the business cycle is individually adjusted by applying a

constant elasticity to the deviation of the respective macroeconomic base, defined in real terms, from its trend.3

The cyclical effects on taxes and social contributions are calculated on the revenue side, while on the expenditure

side only unemployment benefits are assumed to be influenced by the macroeconomic context.4

With regard to

temporary measures, in Portugal these are considered to correspond to the values used in the analysis of public fi-

nances developed by Banco de Portugal.5Finally, the structural levels of the different revenue and expenditure cat-

egories are expressed as a percentage of nominal trend GDP,6

instead of the nominal GDP, so as to ensure

consistency with the cyclically adjusted values in the numerator.

Table 1 shows for the Portuguese case the adjustments to the change in the ratio of the actual balance to GDP,

which make it possible to break down the change in the structural primary balance into its different components,

both on the revenue and on the expenditure side, for the 2001-2005 period. With regard to taxes and social contri-

butions, the change in the respective structural ratios is broken down, on an item-by-item basis, into four explana-

tory factors: (i) the fiscal drag, which given nominal growth in the trend macroeconomic base, corresponds to the

automatic effect on tax revenue resulting from the fact that the elasticity of the fiscal item vis-à-vis the respective

base is not equal to one; (ii) the decoupling of the macroeconomic base from GDP that represents the effect of the

growth differential between the trend macroeconomic base and nominal trend GDP on tax revenue; (iii) legislation

changes, the fiscal impact of which corresponds to official estimates or, in their absence, is based on calculations

according to available information; and (iv) the residual, which allows to quantify the part of the development in the

structural ratios of taxes and social contributions that is not explained by the three previous factors. The residual

component is an important element in this framework and it may contribute in several ways to the analysis of public

finances. On the one hand, it may help to understand past developments, giving quantitative indications on the im-

portance of specific non-systematic events or on the existence of favourable or unfavourable trends in certain fiscal

(1) For further details on the approach used in this box, see Kremer et al., “A disaggregated framework for the analysis of structural developments in public finances”, ECB Working

Paper No 579, January 2006.

(2) See Bouthevillain et al., (2001), “Cyclically adjusted budget balances: an alternative approach”, W orking Paper No. 77, September, ECB.

(3) Estimated by applying the Hodrick-Prescott filter with a smoothing parameter (�) equal to 30.

(4) In the ESCB methodology, fiscal variables adjusted for the effects of the business cycle (and respective macroeconomic bases in brackets) are: taxes on household income (private

sector wage bill), taxes on corporate income (proxy of corporate profits), taxes on production and imports (private consumption), social contributions (private sector wage bill) and,

on the expenditure side, unemployment benefits (number of unemployed).

(5) For further details on the effects of temporary measures in the Portuguese case, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004", Annual

Report 2004, Banco de Portugal.

(6) Defined as the product between real trend GDP, estimated by applying the Hodrick-Prescott filter with a smoothing parameter (�) equal to 30, and the GDP deflator.



114

items. Reference should be made, for example, to the fiscal impact of asset price developments, the possible

pro-cyclical behaviour of the tax evasion phenomenon or the effect on tax revenue of structural changes in the be-

haviour of economic agents, such as their consumption pattern. On the other hand, the residual component may

reveal the need to reassess the impact of changes in legislation or the fiscal elasticities used.

As can be seen in Table 1, the actual budget balance deteriorated by 2.8 p.p. of GDP in 2005, largely due to the ab-

sence of temporary measures with a significant impact on public accounts (-2.1 p.p. of GDP). Given that the cycli-

cal component of the balance declined only very slightly, in contrast to interest expenditure, the structural primary

balance deteriorated by 0.5 p.p. of the nominal trend GDP, pointing to an expansionary stance of fiscal policy in that

year. It should be noted that the increase in the stock of public debt was responsible for the marginal rise in interest

expenditure, since there was a decline in the average interest rate of public debt. Developments in the structural

situation in 2005 are accounted for by an increase in primary expenditure (1.2 p.p. of nominal trend GDP) that is not

totally offset by a rise in total revenue (0.7 p.p. of nominal trend GDP).

As regards tax revenue, the strong increase (0.9 p.p. of nominal trend GDP) is almost entirely explained by the re-

sidual effect, similarly to the previous year. Indeed, the impact of the progressivity of taxes on household income, in

view of the rise in the trend wage bill, causes a negligible fiscal drag in 2005. In turn, most macroeconomic bases

defined in nominal terms show trend growth close to that of nominal trend GDP. The most significant effect, albeit

small, relates to more favourable developments in private consumption than in GDP. Legislative changes warrant a

decline in tax revenue by 0.3 p.p. of nominal trend GDP in 2005, due to the lagged effects of policy measures imple-

mented in previous years, which exceed the impact of tax rises approved in the middle of the year. Hence, not ex-

cluding the occurrence of other non-quantifiable effects that may have affected tax revenue in 2005, a substantial

part of the residual of total taxes and social contributions (1.0 p.p. of nominal trend GDP) may be associated with

gains relating to an improvement in tax administration effectiveness. The behaviour of other revenue is essentially

caused by developments in transfers from the European Union.

The strong increase in primary expenditure in 2005 is largely explained by social payments, in particular pensions

and social benefits in kind. In addition, compensation of employees and intermediate consumption have also made

a positive, albeit small, contribution to these developments. The ratios of the other primary expenditure items to

nominal trend GDP remained virtually unchanged.



115

Table 1

CHANGE IN GENERAL GOVERNMENT REVENUE AND EXPENDITURE, ADJUSTED FOR THE EFFECTS OF

THE ECONOMIC CYCLE AND TEMPORARY MEASURES

As a percentage of nominal trend GDP

2001 2002 2003 2004 2005

Actual balance (improvement +, deterioration -)(a) -1.4 1.4 0.0 -0.3 -2.8

Cyclical component -0.2 -0.4 -1.0 0.0 -0.1

Temporary measures -0.3 1.3 1.0 -0.2 -2.1

Structural primary balance (improvement +, deterioration -) -0.8 0.5 0.1 0.0 -0.6

Interest payments 0.0 -0.1 -0.2 -0.1 0.1

Effect of the change in the average interest rate on public debt -0.1 -0.3 -0.3 -0.1 -0.1

Effect of the change in the debt stock 0.1 0.1 0.1 0.1 0.2

Structural primary balance (improvement +, deterioration -) -0.8 0.4 -0.1 -0.1 -0.5

Total revenue 0.2 0.5 -0.2 0.5 0.7

Taxes on household income 0.0 -0.3 0.1 -0.1 0.1

Fiscal drag 0.0 0.1 0.1 0.1 0.0

Decoupling of the macroeconomic base from GDP 0.0 0.0 0.0 0.0 0.0

Changes in legislation -0.3 -0.1 0.1 0.0 -0.1

Residual 0.3 -0.3 -0.1 -0.2 0.1

Taxes on corporate income -0.4 -0.1 -0.6 0.6 -0.1

Fiscal drag 0.0 0.0 0.0 0.0 0.0

Decoupling of the macroeconomic base from GDP 0.1 0.0 0.0 0.0 0.0

Changes in legislation -0.2 0.0 -0.1 0.1 -0.5

Residual -0.2 -0.1 -0.4 0.5 0.4

Taxes on production and imports 0.2 0.4 0.1 0.1 0.9

Fiscal drag 0.0 0.0 0.0 0.0 0.0

Decoupling of the macroeconomic base from GDP 0.0 -0.1 0.0 0.0 0.1

Changes in legislation 0.3 0.6 0.5 0.1 0.3

Residual -0.1 -0.2 -0.4 -0.1 0.5

Social contributions 0.2 0.2 0.3 0.4 0.0

Fiscal drag 0.0 0.0 0.0 0.0 0.0

Decoupling of the macroeconomic base from GDP -0.1 -0.1 0.0 0.0 0.0

Changes in legislation 0.0 0.0 0.0 0.0 0.0

Residual 0.3 0.2 0.3 0.4 0.0

Memo item: included in expenditure(b)

0.0 0.2 0.3 0.3 0.1

Total taxes and social contributions 0.0 0.2 -0.1 0.9 0.9

Fiscal drag 0.0 0.1 0.1 0.1 0.0

Decoupling of the macroeconomic base from GDP 0.0 -0.1 0.1 0.1 0.1

Changes in legislation -0.2 0.5 0.5 0.2 -0.3

Residual 0.2 -0.3 -0.7 0.6 1.0

Memo item: included in expenditure(b)

0.0 0.2 0.3 0.3 0.1

Other revenue(c) 0.1 0.3 -0.2 -0.5 -0.2

Of which relating to EU 0.3 0.3 -0.2 -0.1 -0.2

Primary expenditure 1.0 0.1 -0.1 0.6 1.2

Social payments 0.4 0.5 1.7 0.0 0.8

of which: Expenditure on pensions 0.3 0.3 0.5 0.5 0.5

Unemployment benefits 0.0 0.1 0.0 0.0 0.0

Social benefits in kind 0.1 0.1 1.0 -0.3 0.3

Compensation of employees 0.1 0.3 -0.8 0.2 0.1

Intermediate consumption 0.0 -0.2 -0.5 0.0 0.1

Subsidies 0.1 0.2 0.2 -0.3 0.0

Investment 0.1 -0.4 -0.5 -0.1 0.0

Other expenditure(d)

0.2 -0.3 -0.3 0.8 0.1

Notes: (a) Change in the actual balance, in the cyclical component and in the effects of temporary measures as a percentage of nominal GDP. Due to differences in the denominator, the

change in the structural balance as a percentage of nominal trend GDP may differ slightly from the change in the actual balance excluding the ratios of cyclical effects and temporary mea-

sures to the nominal GDP. (b) Part of the residual of actual social contributions relating to social contributions of the civil servants’ social security scheme and with imputed contributions,

both recorded in compensation of employees on the expenditure side. (c) Includes other current revenue, sales and capital revenue. (d) Includes other current revenue, sales and other

capital expenditure.

7. FINANCIAL SITUATION

7.1. Overview

In 2005 the external indebtedness of the Portuguese economy increased further, in a context where fi-

nancing conditions remained extremely favourable and the fiscal position continued to deteriorate.

The rise in indebtedness reflected the decline in domestic savings as a percentage of GDP, given that

investment in fixed capital decreased. Low interest rate levels and favourable contractual conditions

offered by banking institutions continued to foster access by the non-financial private sector to the

credit market, particularly for house purchase. Such conditions have made it possible to restrain the

debt burden of Portuguese households, whose indebtedness as a percentage of disposable income is

among the highest in the euro area. Private consumption continued to grow at a faster pace than dis-

posable income and the household savings rate continued to trend downwards. Under these circum-

stances, net lending by households would have declined further in 2005 if capital transfers associated

with extraordinary contributions to pension funds made by financial institutions had not been signifi-

cant.1

Non-financial corporations’ savings as a percentage of GDP also declined, reflecting the de-

celeration in sales in a context of relatively tight wage costs and rising energy prices. Profitability has

thus declined, most markedly in the tradable sector, which is generally price-taker. In this context, and

despite the decline in corporate investment, net borrowing requirements of non-financial corporations

increased in 2005.

In turn, activity in the financial sector increased significantly. In a year marked by the adoption of the In-

ternational Accounting Standards, whose effects hamper the intertemporal analysis of the financial po-

sition of institutions, the assets of both the banking system and institutional investors increased

considerably, partly as a result of the favourable performance of the national and international financial

markets, but also reflecting the effective growth of their primary activity of financial intermediation.

Therefore, banks’ activity on a consolidated basis continued to be characterised by the significant ex-

pansion of credit to customers and by the growing importance of the provision of services in raising

earnings to the detriment of the financial margin. Moreover, in 2005 the positive contribution of

branches and subsidiaries abroad to both bank activity and earnings was also worthy of note. The fi-

nancing of the banking system proceeded largely via the issuance of debt securities in international fi-

nancial markets by branches and subsidiaries abroad. However, securitisation operations and the

recourse to the interbank money market (in the latter case mainly by non-domestic institutions) also

played an important role in 2005.2

Against the background of a declining household savings rate, re-

sources from customers grew modestly, also reflecting the strategy adopted by some major banking

groups to channel resources from customers to alternative investments managed by institutions not in-

cluded in the consolidation perimeter for supervisory purposes. Indeed, the savings flow channelled to

institutional investors was particularly significant in 2005, reflecting better profitability opportunities

offered by products managed by these institutions in the context of favourable developments in

international financial markets.


Financial Situation | Chapter 7

117

(1) On a national accounts basis, extraordinary contributions to pension funds correspond to capital transfers to households, given that they lead to an increase

in pension funds’ mathematical reserves, which are financial assets of this sector.

(2) Non-domestic institutions are those whose management control is ensured by non-resident institutions, either institutions governed by Portuguese law,

subsidiaries of non-resident banking groups (subject to the supervision of Banco de Portugal), or branches of credit institutions having their head office

abroad.

7.2. Financial Account and International Investment Position

In 2005 the financial account posted net financial inflows amounting to 8.8 per cent of GDP, which re-

flects an increase above 2 percentage points of GDP in net borrowing requirements of the Portuguese

economy compared with the previous year (Table 7.1).3

This rise resulted from both the deterioration of

the overall general government deficit and higher borrowing requirements of the non-financial private

sector.4,5

Non-residents’ lending to the general government increased significantly, while external fi-

nancing to the Portuguese banking system was more subdued than in the previous years. In addition,

net inflows of external funds to the non-financial private sector were recorded.

The considerable amount of Portuguese debt securities purchased by non-residents exceeded gen-

eral government borrowing requirements in the year. The strategy followed by the Portuguese govern-

ment to strengthen the medium and long-term component of the Portuguese public debt, by issuing a

significant amount of fixed-rate bonds (mainly with 10- and 15-year maturities) contributed to this

development.

As in previous years, non-financial private sector borrowing requirements were mostly met by the resi-

dent banking system, which resorted to debt issuance abroad.6

In 2005 the external financing of mone-

tary financial institutions continued to be mainly processed through the issuance of medium and

long-term securities by subsidiaries abroad of Portuguese banks.7

However, net issuance of bonds by

subsidiaries abroad was below the levels recorded in 2004, accounting for around 4 per cent of GDP in

the year as a whole.8

Moreover, credit securitisations continued to play an important role in the raising

of external funds by Portuguese banking groups. In 2005 the amount of securities issued by securitisa-

tion vehicles was close to 4 per cent of GDP, i.e. slightly higher than in the previous year, with around

half of that amount being repurchased by resident banks.9,10

In addition to external financing directly intermediated by banks, there were also net financial inflows

channelled directly to non-financial corporations. This was the result, on the one hand, of the purchase

by non-residents of debt securities issued by this sector and, on the other hand, of the use of deposits


Chapter 7 | Financial Situation

118

(3) The financial account of the balance of payments comprises the channels (instruments and institutional sectors) used to process the external financing of

the economy. The difference between the financial account balance and the combined current and capital account deficit corresponds to statistical errors

and omissions.

(4) In 2003 and 2004 the overall general government deficit was significantly affected by temporary measures implemented with a view to meeting the 3 per

cent of GDP reference value (for more details on this matter, see “Box 6.1 “Budgetary effects of the temporary measures implemented from 2002 to 2004”, in

the 2004 Annual Report). In order to review Portuguese economic developments without the effects of such measures, in ”Chapter 7 Financial Situation" of

the 2004 Annual Report some adjustments were made to the figures on borrowing requirements of both general government and counterpart sectors of

these temporary measures (financial corporations, non-financial corporations and households). Therefore, in this Report, figures corresponding to net

financial savings of these sectors in 2004 are also adjusted for the impact of those temporary fiscal measures.4444444444444444444444444444444

(5) In the absence of temporary measures, general government net borrowing requirements in 2004 would have been fairly larger. Therefore, they would be

closer to those seen in 2005, as would the flow of government debt that would be necessary to issue (and, consequently, the amount of debt that would be

purchased by non-residents). Conversely, in 2005, net borrowing by the non-financial private sector would have increased further, namely for financial

corporations.

(6) As in previous years, financial account records are affected by temporary operations between monetary financial institutions and monetary authorities.

These operations, albeit not implying changes in the overall net financial account transactions, affect the external position of both sectors at the end of the

year and hamper its assessment. Typically, those operations affect other investment liabilities of monetary authorities and other investment assets of other

monetary financial institutions. The figures corresponding to flows and end-year positions adjusted for such operations are included between brackets in

Tables 7.1 and 7.2, respectively.

(7) There was also a significant increase in net external interbank liabilities of other resident monetary financial institutions (mainly of institutions belonging to

non-resident banking groups established in Portugal). However, this increase was related to the restructuring process of a banking group that made an early

redemption of a very large amount of bonds, which was partly offset by an increase in interbank funding.

(8) Such operations are reflected in the financial account mainly as an increase in other investment liabilities of monetary financial institutions, corresponding to

loans or deposits held by non-resident financial institutions with resident institutions.

(9) Such operations correspond to the issuance of securities by non-monetary financial institutions typically held by non-residents. In the financial account, they

are recorded as increases in portfolio investment liabilities of those institutions. Purchases of securities issued as a result of credit securitisation operations

by banks originally granting credit (or by other resident banks typically belonging to the same banking group) are recorded in the financial account as an

increase in portfolio investment assets of other monetary financial institutions, given that they correspond to purchases to the non-resident institutions that

initially held the securities.

(10) In 2005 portfolio investment flows of other monetary financial institutions are influenced by a very significant reduction in liabilities (around 4 per cent of

GDP) resulting from the transfer abroad of a considerable part of the activity of one subsidiary of a non-resident bank established in the Madeira offshore.

This was also reflected in a similar decline in other investment assets of this sector.

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Table 7.1

FINANCIAL ACCOUNT


2003 2004 2005

Net change Change in liabilities Change in assets Net change Change in liabilities Change in assets Net change

Current and capital account -4.0 -5.7 -8.1

Financial account 4.5 15.1(11.8) -8.7(-5.4) 6.4 16.2(14.6) -7.4(-5.9) 8.8

Direct investment 0.4 1.3 -4.5 -3.1 1.7 -0.6 1.1

excluding Madeira and Santa Maria (Azores) offshores 0.7 1.6 -2.3 -0.7 1.8 -1.1 0.7

Portfolio investment -3.7 8.1 -7.6 0.5 9.4 -10.5 -1.1

Financial derivatives 0.0 -2.4 2.3 -0.1 -2.8 2.7 -0.1

Other investment 3.6 8.0(4.7) 0.0(3.3) 8.0 7.8(6.3) 0.1(1.6) 7.9

Reserve assets 4.2 - 1.1 1.1 - 1.0 1.0

By institutional sector of resident investor:

Monetary authorities(a)

-3.3 (2.5) 4.1 (0.9) 1.2 5.3 (2.1) 2.8 (1.3) -0.1 2.7 (1.2)

Portfolio investment -3.7 - 0.7 0.7 - -0.7 -0.7

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other investment -3.8 (2.0) 4.1 (0.9) -0.5 3.6 (0.3) 2.8 (1.3) -0.4 2.4 (0.9)

Reserve assets 4.2 - 1.1 1.1 - 1.0 1.0

General government 3.3 4.1 0.3 4.5 5.9 0.3 6.2

Direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0

excluding Madeira and Santa Maria (Azores) offshores 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Portfolio investment 3.4 4.2 -0.1 4.1 6.8 -0.1 6.7

Financial derivatives -0.1 -0.3 0.3 0.0 -0.4 0.4 0.0

Other investment 0.0 0.3 0.1 0.4 -0.5 0.0 -0.5

Other monetary financial institutions(a)

2.9 (-2.9) -0.2 -2.8 (0.5) -3.0 (0.2) -0.3 -1.6 (0.0) -1.8 (-0.3)

Direct investment 0.2 0.1 -0.2 -0.1 0.0 -0.3 -0.3

excluding Madeira and Santa Maria (Azores) offshores 0.2 0.1 -0.2 -0.1 0.0 -0.3 -0.3

Portfolio investment -4.1 -0.8 -3.3 -4.1 -3.8 -2.2 -6.0

Financial derivatives 0.1 -1.4 1.4 0.0 -1.6 1.6 -0.1

Other investment 6.8 (0.9) 1.9 -0.7 (2.5) 1.2 (4.5) 5.2 -0.6 (0.9) 4.5 (6.1)

Non-monetary financial institutions 3.7 3.5 -3.4 0.1 5.3 -6.2 -0.9

Direct investment -0.6 0.0 -0.1 -0.1 0.7 -0.3 0.5

excluding Madeira and Santa Maria (Azores) offshores -0.3 0.0 -0.1 -0.1 0.8 -0.3 0.5

Portfolio investment 4.1 3.7 -3.6 0.2 4.8 -6.3 -1.5

Financial derivatives 0.0 -0.5 0.5 0.0 -0.4 0.6 0.1

Other investment 0.3 0.2 -0.2 0.0 0.2 -0.2 0.0

Non-financial corporations and private individuals -2.2 3.6 -4.0 -0.5 2.4 0.2 2.5

Direct investment 0.8 1.3 -4.2 -2.9 1.0 -0.1 0.9

excluding Madeira and Santa Maria (Azores) offshores 0.8 1.6 -2.1 -0.5 1.1 -0.6 0.5

Portfolio investment -3.4 1.0 -1.3 -0.3 1.6 -1.2 0.4

Financial derivatives 0.0 -0.1 0.1 0.0 -0.3 0.1 -0.1

Other investment 0.4 1.4 1.4 2.8 0.1 1.3 1.4

Errors and omissions -0.6 -0.7 -0.7


Notes: A (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow. (a) The figures in brackets in other investment of monetary authorities and of other monetary financial institutions

are adjusted for temporary end-of-year operations between the two sectors reversed on the first days of the subsequent year.

previously held in non-resident monetary financial institutions. With regard to external assets of house-

holds, there was some shift in terms of instruments, translated into the decline of deposits and the in-

crease of medium and long-term debt securities and mutual fund units.

Non-monetary financial institutions recorded high amounts of portfolio investment. This development

(also seen, to a lesser extent, in the previous year) mainly reflects a higher demand for medium and

long-term debt securities by insurance corporations and pension funds. This demand reflects the pur-

suit of diversification opportunities, particularly in the long-term segment, within the scope of strategies

followed by these institutions with a view to improving the matching of their portfolios’ duration with the

corresponding liabilities’ duration (typically with very long maturities). This behaviour, also seen at the

international level by this type of institution, has been due to the higher sensitivity of discount rates of

actuarial liabilities to interest rate developments following the adoption of the International Accounting

Standards. Also it has been favoured by wider investment opportunities created by increasing financial

market integration.

Direct investment operations, excluding those associated with companies having their head office in

the Madeira and Azores offshores, corresponded to net inflows of around 0.7 per cent of GDP, ac-

counting for a slight recovery of this type of financing compared to 2004 (Chart 7.1).11

Despite the deterioration of the deficit of the current and capital account in 2005, the increase in the

debtor position of the Portuguese economy vis-à-vis the rest of the world, assessed by the Interna-

tional Investment Position statistics, was virtually unchanged from the previous year (5.3 percentage

points of GDP) (Chart 7.2). Indeed, the financial account balance was only partly reflected on net exter-

nal liabilities of the economy due to the favourable impact from price changes (mainly related to the in-



120

Chart 7.1 Chart 7.2

FLOWS OF FOREIGN DIRECT INVESTMENT

Excluding Madeira and Santa Maria (Azores)

Offshores


INTERNATIONAL INVESTMENT POSITION


-4

-2

0

2

4

6

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Portuguese investment abroad(excluding offshores)

Foreign direct investment (excludingoffshores)

FDI/PIA balance (excludingoffshores)

43

49

54

59

64

39

33

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Debt (a)

Shares and direct investment

Sources: INE and Banco de Portugal. Sources: INE and Banco de Portugal.

Notes: Positive (negative) figures correspond to a net debtor (creditor) position. (a) In-

cludes securities other than shares, other investment, financial derivatives and others.

(11) The exclusion of operations associated with companies having their head office in Madeira and Santa Maria (Azores) offshores is due to the fact that these

operations frequently post significant amounts but merely correspond to the use of these offshores by non-residents to invest in third countries, having no

relevant consequences for the Portuguese economy.

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Table 7.2


EUR million As a percentage of GDP

2003 2004 2005 2003 2004 2005

End of period

position

End of period

position

Transactions Price

changes

Exchange rate

changes

Other

adjustments

End of period

positions

End of period positions

International investment position (IIP) -74 035 -84 416 -12 873 1 983 410 343 -94 553 -53.7 -59.0 -64.3

Direct investment(a)

-20 838 -16 321 -1 582 256 139 504 -17 005 -15.1 -11.4 -11.6

Portfolio investment(b)

-10 731 -12 057 1 586 - 203 508 0 -10 166 -7.8 -8.4 -6.9

Financial derivatives - 28 - 613 172 378 0 0 - 64 0.0 -0.4 0.0

Other investment(c)

-52 585 -64 001 -11 619 0 - 323 - 160 -76 104 -38.1 -44.7 -51.8

Reserve assets 10 146 8 578 -1 431 1 552 86 0 8 785 7.4 6.0 6.0

By institutional sector of the resident investor:

Monetary authorities(d)

19 718 12 052 -3 973 1 535 72 - 28 9 658 14.3 (8.4) 8.4 (6.1) 6.6 (5.8)

Portfolio investment 10 809 9 828 1 013 - 19 0 0 10 822 7.8 6.9 7.4

Financial derivatives 4 0 - 2 2 0 0 0 0.0 0.0 0.0

Other investment -1 242 -6 354 -3 552 0 - 14 - 28 -9 949 -0.9 (-6.8) -4.4 (-6.8) -6.8 (-7.5)

Reserve assets 10 146 8 578 -1 431 1 552 86 0 8 785 7.4 6.0 6.0

General government -41 480 -49 113 -9 187 252 290 7 -57 751 -30.1 -34.3 -39.3

Direct investment 0 0 0 0 0 0 0 0.0 0.0 0.0

Portfolio investment -41 065 -47 599 -9 902 327 - 8 0 -57 182 -29.8 -33.3 -38.9

Financial derivatives 234 - 262 29 - 75 0 0 - 309 0.2 -0.2 -0.2

Other investment - 649 -1 252 686 0 298 7 - 260 -0.5 -0.9 -0.2

Other monetary financial institutions(d)

-63 782 -56 716 2 675 484 - 944 202 -54 299 -46.2 (-40.4) -39.7 (-37.3) -36.9 (-36.2)

Direct investment -2 802 478 409 133 27 101 1 147 -2.0 0.3 0.8

Portfolio investment 1 255 7 224 8 831 - 187 - 51 0 15 817 0.9 5.1 10.8

Financial derivatives - 266 - 342 110 538 0 0 306 -0.2 -0.2 0.2

Other investment -61 969 -64 076 -6 675 0 - 920 101 -71 570 -44.9 (-39.1) -44.8 (-42.4) -48.7 (-47.9)

Non-monetary and financial institutions 21 074 19 940 1 348 676 374 158 22 496 15.3 13.9 15.3

Direct investment -2 001 -3 736 - 712 - 49 0 158 -4 339 -1.5 -2.6 -3.0

Portfolio investment 22 766 23 399 2 270 598 306 0 26 574 16.5 16.4 18.1

Financial derivatives 0 - 9 - 180 127 0 0 - 62 0.0 0.0 0.0

Other investment 308 285 - 30 0 68 0 323 0.2 0.2 0.2

Non-financial corporations and private individuals -9 565 -10 578 -3 737 - 965 618 5 -14 657 -6.9 -7.4 -10.0

Direct investment -16 035 -13 063 -1 279 172 112 245 -13 813 -11.6 -9.1 -9.4

Portfolio investment -4 496 -4 910 - 626 - 922 261 0 -6 197 -3.3 -3.4 -4.2

Financial derivatives 0 0 215 - 214 0 0 1 0.0 0.0 0.0

Other investment 10 966 7 395 -2 047 0 245 - 240 5 352 8.0 5.2 3.6


Notes: (a) Includes quarterly estimates calculated by the Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from Direct Investment Surveys. (b) Includes quarterly estimates calculated by the Banco de Portugal based on the accumulation of monthly flows and on the available

annual data obtained from the “Survey on stocks of foreign securities held by residents”. (c) Includes, in some components, quarterly estimates calculated by the Banco de Portugal, based on the accumulation of monthly flows. (d) The figures in brackets in other investment of monetary authorities and of other monetary financial in-

stitutions are adjusted for temporary end-of-year operations between the two sectors reversed on the first days of the subsequent year.

crease in gold international prices, which contributed by 1.1 p.p. of GDP to the increase in the value of

external assets) (Table 7.2).

Reflecting the significant amount of Portuguese government debt purchased by non-residents in 2005,

the net external debtor position of general government increased significantly (5 p.p. of GDP), while

net external debt of the non-financial private sector also showed an increase. Conversely, net external

liabilities of the financial sector declined, mostly reflecting a rise in securities issued by non-residents

(mostly euro area issuers) held by insurance corporations and pension funds.

7.3. Securities Market

In 2005 the Portuguese stock market continued to show significant gains, reflecting overall improve-

ments in earnings of listed companies (Chart 7.3). Both turnover and stock market capitalisation grew

compared with the previous year (around 11 and 9 per cent respectively), with the turnover ratio (de-

fined as the ratio of the value of traded shares to the value of quoted shares) remaining virtually un-

changed slightly above 50 per cent (Chart 7.4).

Net issuance of (quoted and unquoted) shares by Portuguese corporations accounted for around 2 per

cent of GDP in the year as a whole, i.e. fairly below what was seen in 2004 (Tables 7.3 and 7.4).12

These developments largely reflected the virtually nil figure recorded by net issuance of shares of

non-financial corporations in 2005, as a result of the winding up of a large company at the beginning of

the year (worth 1 per cent of GDP). In 2004 the amount of shares issued by listed companies had been

significantly influenced by the issuance of shares intended to finance a Portuguese investment opera-

tion abroad. In turn, the net issuance of shares by financial corporations in 2005 was slightly higher

than in the previous year (1.5 per cent of GDP), mainly reflecting the maturing of convertible bonds

issued by a Portuguese banking group.



122

Chart 7.3

STOCK PRICE INDICES STOCK MARKET CAPITALIZATION AND

TRANSACTIONS

50

60

70

80

90

100

110

120

130

140

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05

De

c2

00

1=

10

0

PSI Geral Dow Jones Euro Stoxx S&P 500

0

20

40

60

80

2000 2001 2002 2003 2004 2005

EU

Rb

illio

n

0

30

60

90

120

Pe

rce

nt

Stock market capitalisation (end-of-period)TransactionsAverage turnover ratio (RHS)

Source: Bloomberg. Source: CMVM.

Chart 7.4

(12) These amounts, related to shares and other equity as well as bonds, do not include net issuance of securities resulting from credit securitisation operations

(i.e. securitisation units and securitised bonds respectively), even though they are included in Tables 7.3 and 7.4.

With regard to debt securities, net issuance totalled slightly more than 5 per cent of GDP, i.e. margin-

ally below that seen in 2004. However, both the Portuguese government and non-financial corpora-

tions resorted intensely to this type of financing. In the first case, reflecting the increase in general

government borrowing requirements, the net issuance of government debt amounted to almost 8 per

cent of GDP, with special reference to the substantial issuance of fixed-rate Treasury bonds (with 3

and, mainly, 10 and 15-year maturities). Also net debt issuance by non-financial corporations in-

creased significantly, in the form of bonds and commercial paper. Against the background of the main-

tenance of relatively low spreads in the medium and long-term segment of debt, some companies

seem to have used bond issuance � mostly with an indexed rate � to restructure the maturity of their

financial liabilities. By contrast, net issuance of debt securities by resident financial corporations was

considerably negative. These developments were largely due to the early redemption of bonds by two

banks belonging to non-resident economic groups. However, Portuguese banking groups continued to

issue significant amounts of bonds in international markets through subsidiaries abroad. Finally, there

was considerable net redemption of cash certificates, following the trend shown in 2004 by a number of

financial groups aimed at abandoning this form of raising resources from customers.



123

Table 7.3

ISSUANCE OF SECURITIES IN THE EXTERNAL AND INTERNAL MARKETS BY INSTITUTIONAL SECTOR


2003 2004 2005

Net issuance by residents

Debt securities 4.7 5.6 6.4

General government 3.2 4.6 7.8

Monetary financial institutions 1.3 -1.0 -7.1

Non-monetary financial institutions 1.2 0.9 1.9

Of which:

Asset-backed bonds 1.3 0.1 1.2

Non-financial corporations -1.0 1.1 3.8

Shares and other equities(a)

9.9 6.9 4.4

Monetary financial institutions 0.8 0.5 0.4

Non-monetary financial institutions 6.4 3.8 3.8

Of which:

Securitisation units 6.4 3.1 2.7

Non-financial corporations 2.7 2.6 0.1

Investment fund units 1.6 1.4 2.7

Money market fund units 0.3 0.0 0.0

Mutual fund units 0.9 0.7 2.1

Real estate fund units 0.5 0.7 0.7

Memo:

Net issuance of debt securities by residents in the external market(b)

-1.2 -1.1 -3.8

Issuance of shares by incorporation of reserves(c)

0.1 0.1 0.1

Net issuance abroad by non-resident entities that are branches and subsidiaries of

resident entities

Financial institutions 5.5 5.1 4.2


Gross issuance of bonds by type of rate

Fixed rate


Financial companies 2.1 2.3 1.5


Indexed rate


Financial companies 4.5 2.8 3.6


Sources: CMVM and Banco de Portugal.

Notes: (a) Excluding investment fund units. Only shares/securitisation units are considered. (b) Included in “Debt securities”. (c) Included in “Shares and other equity”.

7.4. Non-financial Resident Institutional Sectors

7.4.1. Households

In 2005, according to available data, net lending by households increased slightly compared to the pre-

vious year (Chart 7.5). However, this development mainly reflected the effect of capital transfers asso-

ciated with extraordinary contributions made by financial institutions to their pension funds. Excluding

this effect, net lending by households would have declined.13

In fact, the savings rate of Portuguese

households maintained the downward trend seen since 2002, declining significantly in the year under

review (estimated at almost 1 percentage point of disposable income). Moreover, household invest-

ment in fixed capital was virtually unchanged from 2004. The pace of growth of private consumption

was clearly higher than that of disposable income, albeit showing some deceleration over the year (see

“Section 2 of Chapter 3 Output”). In parallel, intentions of Portuguese consumers to save in the

short-term were very negative in the course of 2005. Such developments are particularly striking given

the low levels of consumer confidence (mainly following the announcement of tax rises around

mid-year), a higher unemployment rate, the adverse effects on the permanent income of the deteriora-

tion in the structural deficit of public accounts and the growing uncertainty about the sustainability of



124

Table 7.4

NET ISSUANCE OF SECURITIES BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF

INSTRUMENT


2003 2004 2005

Debt securities

Government securities 3.2 4.6 7.8

Commercial paper, Treasury bills and other short-term securities (excluding CEDICs)(a)

2.8 4.3 1.5

CEDICs(a)

0.1 0.6 -0.2

Fixed rate Treasury bonds 1.0 0.3 6.6

Variable rate Treasury bonds -0.7 -0.5 -0.1

Other government securities 0.1 -0.1 0.0

Commercial paper and other short-term securities (except general government)(b)

-0.7 1.2 1.8

Classical bonds (excluding bonds issued by the general government and asset-backed bonds) 0.3 0.1 -1.6

Cash certificates 1.6 0.6 -2.1

Convertible bonds -0.1 -0.3 -0.5

Warrants -0.1 0.0 0.0

Asset-backed bonds 1.3 0.1 1.2

Participation bonds 0.0 0.0 -0.1

Other securities -0.7 -0.6 -0.2

Shares and other equity

Shares 3.5 3.9 1.7

Listed companies 0.7 0.7 0.4

Non-listed companies 2.8 3.2 1.2

Mutual fund units 1.6 1.4 2.7

Securitisation units 6.4 3.1 2.7


Notes: (a) CEDICs – short-term special debt certificates issued by the government, chiefly intended for investments of treasury surpluses of general government entities. (b) Including

commercial paper issued at over 1 year.

(13) According to the methodology followed by the Portuguese National Accounts (European System of Accounts (ESA) 1995), extraordinary payments made

by employers to private social insurance funds (such as Pension Funds) in order to increase the actuarial reserves of these funds shall be recorded as

capital transfers, payable by the employer’s sector and receivable by the funds’ sector. The definition of capital transfers in ESA 1995 corresponds to

transactions, in cash or in kind, resulting in a commensurate change in the financial or non-financial assets included in the balance sheets of at least one of

the parties involved in the transaction. Given that social insurance funds’ reserves are considered by ESA 1995 as if owned by the household sector, an

adjustment between the funds and the household sectors is required. This adjustment is recorded in national accounts as other capital transfers payable by

the funds’ sector and receivable by the household sector, thus increasing net lending (or decreasing net borrowing) of the latter.

the prevailing social security schemes. The referred lack of household incentives to save has been

partly supported by the overall favourable conditions in the credit market, namely the low levels of

interest rates and the availability of loan arrangements facilitating the containment of the debt burden

in the short term.

In 2005 household indebtedness increased further by around 6 percentage points of GDP (7.5 per-

centage points of disposable income), amounting to 84 per cent of GDP (117 per cent of disposable in-

come) (Chart 7.6). Growth of loans granted to households stood at around 10 per cent, i.e. slightly

higher than in the previous year. These developments continued to be mainly due to the significant

growth of loans for house purchase (almost 12 per cent). Against a background of low interest rates,

access to this segment of the credit market was also fostered by more favourable conditions offered by

banking institutions (see “Section 1 of Chapter 2 The monetary policy of the ECB and monetary and fi-

nancial conditions of the Portuguese economy"). In particular, and according to the responses of five

Portuguese banks to the Bank Lending Survey, the lengthening of loan maturities persisted together

with a slight narrowing of the interest rate margin. This has helped contain household debt burden.14

Supply conditions seem to have been crucial to keep demand for housing credit at high levels, given

that, and also according to the Bank Lending Survey, both consumer confidence and the consumption

and savings levels have contributed to the reduction or, at least, the stabilisation of demand for loans

for house purchase in 2005 (Chart 7.7).

In turn, credit to households for consumption and other purposes (which at the end of the year ac-

counted for a little over one fifth of total debt) grew at a pace close to that seen in 2004 (around 6.5 per

cent). According to the Bank Lending Survey, demand for this type of credit increased slightly through-

out 2005 (Chart 7.8). Consumption expenditure on durable goods has contributed to this increase,

against a background of gradually declining savings not allocated to debt service. Finally, also in this

segment, there was a gradual increase in the share of credit granted by non-monetary financial institu-

tions (over half of total flows of this type of credit in 2005). These developments were partly associated



125

Chart 7.5 Chart 7.6

FINANCIAL TRANSACTIONS OF HOUSEHOLDS INDEBTEDNESS AND INTEREST PAYABLE

As a percentage of disposable income

2.9

3.43.4

3.2

2.8

1.2

0.8

0

4

8

12

16

20

1999 2000 2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fG

DP

0

1

2

3

4

5

As

ap

erc

en

tag

eo

fG

DP

Net acquisition of financial assets

Net incurrence of liabilities

Financial savings (RHS)

(a) 76

8590

97

104110

117

0

30

60

90

120

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

0

2

4

6

8

Pe

rce

nt

HousingOther purposesImplicit interest rate (RHS)Interest payable (RHS)


Note: (a) Financial savings excluding extraordinary contributions to pension funds.


(14) For more information, see the results of the Bank Lending Survey at the Banco de Portugal website (www.bportugal.pt).

with the creation of the credit financial institutions, included in the consolidation perimeter of some Por-

tuguese banking groups, and to which a share of the banking business related to consumer credit has

been moved.

The high level of household indebtedness � which, as a percentage of GDP and of disposable in-

come, is one of the highest among the euro area countries (Chart 7.9) � was reflected in a small in-

crease of interest payable by this sector in 2005, despite the decline recorded by the relevant interest

rates in average terms (Charts 7.6 and 7.10). This contrasts with developments seen since 2002,

when the impact on the interest component of debt service of falling interest rates more than offset the

effects of rising debt.

Despite the high growth of household debt (translated into a much higher flow than that observed since

2002), the coverage ratio of liabilities by financial assets of this sector declined only slightly in 2005. In

fact, the accumulation of financial assets by households was also very significant (accounting for over

10 per cent of GDP) (Chart 7.11). Therefore the downward profile shown by changes in financial assets

since 2002 was interrupted in the year under review. This reflected, on the one hand, the better perfor-

mance of securities markets over the past two years and, on the other hand, the availability of more di-

versified investment products made available to households.15

In 2005 net investments in securities by

households amounted to around 4 per cent of GDP, i.e. almost twice than in the previous year, with a

marked increase in mutual funds (almost 2 per cent of GDP). Also investments in life insurance prod-

ucts increased significantly (4 per cent of GDP). This increase was associated to a significant extent

with the implementation of the Council Directive on taxation of savings and largely reflects the move of

emigrants’ savings, originally in the form of deposits with resident banks, to capitalisation products of-



126

Chart 7.7 Chart 7.8

DEVELOPMENTS IN HOUSEHOLDS’ DEMAND FOR

LOANS FOR HOUSE PURCHASE AND KEY

FACTORS

DEVELOPMENTS IN HOUSEHOLDS’ DEMAND FOR

CONSUMER CREDIT AND OTHER LENDING AND

KEY FACTORS

1

2

3

4

5Q

4:2

00

2

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q2

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Demand Consumer

confidence

(b)

Consumption

expenditure

(b)

Household

savings (b)

Ove

rall

asse

ssm

en

t(a

)

-2

-1

0

1

2

Ke

yfa

cto

rsu

nd

erl

yin

gd

em

an

d[d

evia

tio

nfr

om

the

ne

utr

alva

lue

(3)]

1

2

3

4

5

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q4

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Q2

:20

02

Q4

:20

03

Q4

:20

04

Q4

:20

05

Demand Consumer

confidence

(b)

Expenditure

on durable

consumer

goods (b)

Household

savings (b)

Ove

rall

asse

ssm

en

t(a

)

-2

-1

0

1

2

Ke

yfa

cto

rsu

nd

erl

yin

gd

em

an

d[d

evia

tio

nfr

om

the

ne

utr

alva

lue

(3)]

Source: Banco de Portugal (Bank Lending Survey).

Notes: (a) Average responses of the five Portuguese banking groups to the euro area

Bank Lending Survey. Figures below 3 correspond to factors contributing to the decline in

demand for credit compared to the previous quarter, while figures above 3 account for

factors prompting an increase in demand for credit. (b) Right-hand scale.


Notes: (a) Average responses of the five Portuguese banking groups to the euro area

Bank Lending Survey. Figures below 3 correspond to factors contributing to the decline in

demand for credit compared to the previous quarter, while figures above 3 account for

factors prompting an increase in demand for credit. (b) Right-hand scale.

(15) Changes in financial assets held by households in 2005 are strongly influenced by the above-mentioned extraordinary contributions to pension funds,

accounting for 1.4 per cent of GDP (0.4 per cent of GDP in 2004). However, even excluding such extraordinary contributions – which basically resulted from

changes in the accounting system –, the accumulation of financial assets in 2005 was higher by more than 1.5 percentage points than in 2004 and, as a

percentage of GDP, stood virtually at the same level as in 2002 and 2003.



127

Chart 7.9

HOUSEHOLD INDEBTEDNESS IN EURO AREA

COUNTRIES(a)


INTEREST RECEIVABLE AND PAYABLE BY

HOUSEHOLDS

As a percentage of disposable income

0

20

40

60

80

100

120

Port

ugal

Belg

ium

Germ

any

Gre

ece

Spain

Fra

nce

Italy

Neth

erlands

Austr

ia

Fin

land

Euro

are

a(b

)

Per

cent

1995 1999 2004 2005

-6

-4

-2

0

2

4

6

1999 2000 2001 2002 2003 2004 2005

Per

cent

Interest payable (Inverted scale)

Interest receivable

Net interest

Sources: Eurostat (up to and including 2004, except for Portugal), national central banks,

national statistical offices and Banco de Portugal.

Notes: Banco de Portugal calculations for 2005. (a) Includes liabilities related to loans

and (consolidated) securities other than shares. (b) Excluding Ireland and Luxembourg.


Chart 7.11

OPERATIONS ON HOUSEHOLD FINANCIAL

ASSETS


-4

0

4

8

12

16

20

1999 2000 2001 2002 2003 2004 2005

Per

cent

TotalExcluding

extraordinary

contributions to

pension funds

Extraordinary contributions to pension funds

Life insurance technical reserves

Mutual fund units

Shares and other equity excluding mutual fund units

Securities other than shares

Currency and deposits

Other assets


Note: Other assets include other (non-life) insurance and pension fund technical reserves

excluding those related to extraordinary contributions, trade credits and other loans and

other unspecified assets.

Chart 7.10

fered by insurance corporations belonging to economic groups in which these banks are included.16

The above-mentioned extraordinary contributions to the pension funds also translated into a signifi-

cant accumulation of claims by households in the form of insurance technical reserves. Net flows of in-

vestment in deposits by households were virtually nil in 2005 mainly reflecting emigrants’ portfolio

shifts in the resident banking system.

7.4.2. Non-financial Corporations

In 2005 net borrowing by non-financial corporations is estimated to have increased compared to the

previous year (Chart 7.12). Such development reflected exclusively a further decline in this sector’s

current savings (estimated at almost 2 percentage points of GDP), given that investment was lower

than in 2004 (Supplementary Table A.7.12.).

Net borrowing requirements of Portuguese non-financial corporations increased very significantly in

the late 1990s, more than in other euro area countries, reflecting both the significant level of invest-

ment in fixed capital and the internationalisation effort of a number of companies. In the beginning of

the current decade, net borrowing was also high, particularly due to the intense activity of mergers and

acquisitions related to the restructuring process of economic groups. Subsequently, this sector as a

whole followed an adjustment path as current savings recovered and corporate investment gradually

decelerated. However, this adjustment trend was interrupted in 2004 and 2005, despite the low level of

investment in fixed capital carried out by the sector, reflecting a significant fall in current savings, thus

contrasting to sector developments in the euro area as a whole.



128

Chart 7.12

FINANCIAL TRANSACTIONS OF NON-FINANCIAL

CORPORATIONS


-4.9 -4.9-4.2-4.4-5.5

-6.7

-8.3

-10

-5

0

5

10

15

20

25

1999 2000 2001 2002 2003 (b) 2004 (b) 2005

Pe

rce

nt

Net acquisition of assets (a)

Net incurrence of liabilities (a)

Financial saving (a)

Financial saving


Note: (a) Excluding operations related to Portuguese investment abroad and foreign di-

rect investment of companies having their head office in Madeira’s offshore. (b) Dotted

lines represent figures adjusted for temporary fiscal measures.

(16) The Council Directive 2003/48/EC on taxation of savings was approved in June 2003, being transposed to Portuguese law by the Decree-Law No 62/2005

of 11 March, entering into force on 1 July 2005. This Directive aims at the creation of mechanisms for the automatic exchange of information between

Member States in order to enable interest payable in one Member State to individuals (households) resident in another Member State to be subject to

taxation in accordance with the law of the latter Member State. It should be noted that this directive only covers savings income in the form of interest, such

as income of deposits and debt securities, excluding pensions and insurance benefits. The implementation of this Directive comprises paying entities

established in the territory to which the Treaty on European Union applies, including offshores within the EU. Under this Directive, Portuguese emigrants no

longer benefit from the reduced income tax of 11.5 per cent on interest on deposits held in Portugal.

The gradual decline in non-financial corporations’ savings in 2004 and 2005 seems to be associated

with the deceleration in sales, the rigidity of wage costs and the continuing increase in energy prices.

This should be particularly noticeable in companies operating in the tradable sector, where it is not pos-

sible to pass through to the final price a significant share of the cost increases due to external competi-

tion. According to available data regarding the sample of non-financial corporations of the Central

Balance Sheet Data Office of Banco de Portugal, profitability for these companies declined continu-

ously throughout 2005, particularly in the case of small and medium-sized companies.17

Conversely,

profits of most listed non-financial corporations � mainly large companies of the non-tradable sector

� continued to grow significantly.

The increase in net borrowing requirements was reflected both in lower accumulation of financial as-

sets by the non financial corporations and in increased recourse to debt.18

Therefore, the rate of

change in gross debt of this sector was around 7 per cent (approximately 1.5 percentage points higher

than in the previous year), thereby increasing the indebtedness ratio to around 100 per cent of GDP,

i.e. one of the highest in the euro area (Charts 7.13 and 7.14).19

According to the Bank Lending Survey,

the financing of the current activity and debt restructuring should have significantly contributed to the

increased demand for bank loans by non-financial corporations (Chart 7.15). In turn, the financing of



129


TOTAL DEBT OF NON-FINANCIAL CORPORATIONS


INDEBTEDNESS OF NON-FINANCIAL

CORPORATIONS IN EURO AREA COUNTRIES(a)


76

83

91 9396 97

100

68 75 86 88 92 90 940

30

60

90

120

1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

0

1

2

3

4

5

6

Pe

rce

nt

0

20

40

60

80

100

120

Po

rtu

ga

l

Belg

ium

Ge

rma

ny

Gre

ece

Spain

Fra

nce

Italy

Ne

the

rla

nd

s

Au

str

ia

Fin

lan

d

Eu

roa

rea

(b)

Pe

rce

nt

1995 1999 2004 2005


Sources: Eurostat (up to and including 2004, except for Portugal), national central banks,

national statistical offices and Banco de Portugal.

Notes: Banco de Portugal calculations for 2005. (a) Includes liabilities related to loans

and (consolidated) securities other than shares. (b) Excluding Ireland and Luxembourg.

TOTAL excluding FDI of corporations having their head-

office in Madeira offshore + trade credit

TOTAL excluding FDI of corporations having their head-

office in Madeira offshore

TOTAL (securities other than shares + loans)

Interest paid (RHS)

(17) For a detailed characterisation of both the sample of companies participating in the Central Balance Sheet Data Office of Banco de Portugal (in the annual

and quarterly surveys) and the original results used in this Chapter, see Banco de Portugal, Supplement 5/2005 to the Statistical Bulletin of December 2005.

In both cases, but mainly in the Quarterly Survey, these samples are significantly biased towards large companies.

(18) The accumulation of financial assets by non-financial corporations in 2005 was strongly influenced by the significant increase in December in outstanding

deposits held by this sector with resident banks, which was reversed to a large extent during the following month. Even though outstanding deposits of

non-financial corporations usually increase at the end of the year, the amount observed in 2005 was extraordinary and may be partly associated with the

temporary investment of funds resulting from the significant issuance of commercial paper by these companies in December.

(19) The debt definition considered here includes loans granted by resident and non-resident credit institutions; loans/advances granted by non-resident

companies of the same economic group (excluding those granted to non-financial corporations having their head office in the Madeira offshore); commercial

paper and bonds issued by non-financial corporations held by other sectors and trade credits payable by other sectors.

investment was the factor mostly indicated by surveyed banks as contributing to reduce credit demand

by this sector. This seems consistent with the unfavourable path of gross fixed capital formation in the

past few years. In the context of relatively favourable conditions for debt issuance in the market, in

2005 there were important net issuances of bonds (mainly in the first half of the year) and commercial

paper (more significantly in the second half of the year) by non-financial corporations (almost 4 per

cent of GDP as a whole, after a slightly over 1 per cent in 2004).20

Bond issuance seems to have been

mostly oriented towards debt restructuring (particularly of the maturity profile), rather than investment

financing. The net issuance of shares was considerably lower than in the previous year, and was

negative as a result of the winding up of a large company early in the year.

Note that the capital structure of Portuguese non-financial corporations is characterised by relatively

similar weights of equity and bank credit, which together account for nearly all financial liabilities of the

sector. This structure reflects the relative importance of small and medium-sized companies and, simi-

larly to the euro area, the reduced role of the debt market in financing non-financial corporations. By

contrast, for listed companies, which are typically large companies, the importance of market debt in

total debt is almost the same as that of bank credit.

According to available provisional figures, the financial leverage of non-financial corporations in aggre-

gate terms should have increased in 2005, following declines in the two previous years (Chart 7.16).

However, developments in the ratio of financial debt to capital seem to have been different for small

and medium-sized companies and for larger companies. Thus, although for the sector as a whole this

ratio is estimated to have increased, large Portuguese companies seem to have reduced the share of

financial debt in their capital structure. In fact, available data for the sample of non-financial corpora-

tions participating in the quarterly surveys of the Central Balance Sheet Data Office of Banco de Portu-

gal (mostly large companies) point to a decline in the ratio of financial debt in these companies

throughout 2005.



130

Chart 7.15

TRENDS IN DEMAND FOR LOANS BY

NON-FINANCIAL CORPORATIONS

FACTORS INFLUENCING THE DEMAND FOR

LOANS BY NON-FINANCIAL CORPORATIONS

1

2

3

4

5Q

4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Overall

assessment

Small and

medium-

sized

companies

(b)

Large

companies

(b)

Short-term

loans (b)

Long-term

loans (b)

Ove

rall

asse

ssm

en

t(a

)

-2

-1

0

1

2

De

ma

nd

fea

ture

sb

yco

mp

an

ysiz

ea

nd

loa

nm

atu

rity

[de

via

tio

nfr

om

the

ne

utr

alva

lue

(3)]

-2

-1

0

1

2

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Q4:2

002

Q4:2

003

Q4:2

004

Q4:2

005

Investment

financing

Inventory financing

and working

capital

requirements

Financing of

mergers/acquisitions

and corporate

restructuring

Debt restructuring

De

via

tio

nfr

om

the

ne

utr

alva

lue

(a)


Notes: (a) Average responses of the five Portuguese banking groups to the euro area Bank Lending Survey. Figures below 3 correspond to factors contributing to the decline in demand

for credit compared to the previous quarter, while figures above 3 account for factors prompting an increase in demand for credit. (b) Right-hand scale.

(20) Securities issued by subsidiaries and branches abroad of non-financial corporations, which in general record negligible values, also grew significantly in

2005.

7.4.3. General Government

In 2005 general government debt increased significantly (by 5.4 percentage points of GDP), raising the

public debt ratio to 64.0 per cent. These developments reflected, on the one hand, the deterioration of

the overall deficit of general government and, on the other hand, the more unfavourable contribution of

deficit-debt adjustments (see “Section 5 of Chapter 6 Government debt”). This increase mainly re-

sulted from the issuance of medium and long-term securities (mainly with 10 and 15-year maturities),

which amounted to around 4.4 percentage points of GDP. Against a background of relatively low fi-

nancing costs of medium and long term public debt, the Portuguese government strengthened this

debt component, thus reversing the trend observed in the previous two years when it had resorted

mainly to short-term debt to cover its net borrowing requirements. Nevertheless, the short-term com-

ponent (accounting for one quarter of the total at the end of 2005) increased significantly, by almost 1.2

percentage points of GDP. Despite the further decline in the implicit interest rate of public debt in 2005

(around 15 base points), interest expenditure as a percentage of GDP grew slightly (around 0.1

percentage points) to 2.7 per cent, reflecting the increase in the outstanding debt.

The non-resident sector was the main holder of the Portuguese public debt issued during the year. In

fact, the outstanding public debt held by non-residents increased by an amount close to the change of

the total debt in the year (around 5 percentage points of GDP), raising the importance of this sector as

a creditor of the Portuguese general government to over 58 per cent of the total.



131

Chart 7.16

NON-FINANCIAL CORPORATIONS

Debt to equity ratio(a)

40

60

80

100

120

140

1995 1997 1999 2001 2003 2005(p)

Per

cent


Note: (a) Ratio of gross debt to the amount of financial liabilities related to shares and

other equity.

7.5. Financial Intermediaries

Banking System

In 2005 the analysis of developments in the Portuguese banking system on a consolidated basis is

conditioned by important changes introduced in the financial statements of banking groups as a result

of the adoption of the International Accounting Standards (IAS). In order to smooth the effects of such

changes – which do not allow the accurate inter-annual comparison of data generally used in this anal-

ysis – Banco de Portugal required some additional information from the institutions that adopted the

IAS and the Adjusted Accounting Standards (AAS), in order to make available a set of comparable ac-

counting data for 2004 and 2005. The analysis in this section is largely based on such data.21

Nonethe-

less, developments in the indicators used in the analysis should be interpreted with caution, taking into

account the transition into a new accounting regime.

In 2005 the expansion of activity was significant in major Portuguese banking institutions, largely sus-

tained by persistent high credit growth to the resident non-financial private sector, but also benefiting

from the expansion of activity in subsidiaries abroad. The improvement in securities and financial hold-

ings portfolios, which was associated with the favourable developments in capital markets, also con-

tributed to the increase in assets, despite the sale of some non-strategic holdings. Also worthy of note

is the growing importance of the supply of services as a source of earnings (in particular through com-

missions) to the detriment of the financial margin, thus pursuing the trend observed in previous

years.22

All in all, profitability, solvency, credit quality and provisioning indicators of the group of institutions con-

sidered have improved in 2005, while liquidity indicators worsened slightly. However, profitability de-

velopments in major banking institutions operating in Portugal in 2005 should be interpreted with

caution. Against the background of the changes introduced in the accounting framework in early 2005,

some costs were concentrated in 2004, in particular those costs associated with early retirements.

This procedure has significantly favoured earnings in 2005 vis-à-vis the previous year, on a compara-

ble basis.23,24

Excluding this effect, the increase in profitability in 2005 would be lower, closer to that

recorded over the last years.

In 2005, developments in banks’ gross income continued to be characterised by the rising contribution

of revenues from the direct provision of services, including commissions and other fees, to the detri-

ment of financial margin, as observed in recent years (see “Box 7.1 Financial intermediation margin in

Portugal”) (Table 7.5). Nonetheless, the latter component of gross income rose, chiefly as the result of

the high growth of outstanding credit. The effect in income associated with that level has more than off-

set the opposite effects due, on the one hand, to the narrowing of the interest rate margins in some

market segments with intense competition (such as lending for house purchase), and, on the other, to

the accrued recourse to financing sources with higher costs than those associated with deposits from

customers.



132

(21) Data supplementing the financial statements to be reported to Banco de Portugal by the institutions that have adopted the IAS and the AAS are defined in

Instruction no. 30/2005. The group of institutions that reported data supporting the analysis in this section is defined in “Box 1.1 Banking system data used in

the 2005 Financial Stability Report”, Financial Stability Report, 2005, Banco de Portugal.21212121212121212121212121212121212121212121212121212121

(22) For a more detailed analysis of developments in the Portuguese banking system over the year, see Financial Stability Report, 2005, Banco de Portugal.22222222222222222222222222222222222222222222222222222222

(23) According to the accounting regime in force until 31 December 2004, costs with early retirements were deferred for a long period. Hence, changes in the

pace of early retirements had a mitigated (and smoothed) effect on net results for the year (therefore not significantly affecting results for the year 2004

analysed in early 2005 under the previous accounting system).

(24) These developments in staff costs occurred in spite of significant contributions to pension funds in 2005. This apparent contradiction is explained by the fact

that such contributions were not a cost for the year, but instead reflected increases in liabilities in the transition of the accounting regime, and therefore were

entered as opposed to a capital item.

Fin

ancial

Situ

ation

|C

hapter7

An

nual

Rep

ort

2005

|B

ancodePortugal

133

Table 7.5

MAIN INDICATORS OF THE BANKING SYSTEM(a)

Consolidated basis

Per cent

2000 2001 2002 2003 2004 2004 2005

Profitability, provisioning and solvency

ROE - Return on equity(b)

18.3 17.8 14.1 16.2 14.5 12.5 (19.3) 16.9 (19.9)

ROA - Return on assets(b)

1.11 1.01 0.78 0.91 0.87 0.64 (0.99) 0.98 (1.15)

Financial margin (as a percentage of assets) 2.21 2.24 2.12 2.00 1.94 1.88 1.76

Ratio of operational costs to gross income(b)

58.2 57.6 59.1 57.4 57.2 71.7 (60.5) 59.6 (54.1)

Specific credit provisioning (without country risk)(c)

1.41 1.33 1.30 1.60 1.59 1.14 1.18

Ratio of credit and interest overdue net of specific provisions to credit net of specific provisions(d)

0.72 0.71 0.85 0.66 0.34 - -

Ratio of non-performing loans (net) to total credit (net)(e)

- - - - - 0.44 0.30

Overall capital adequacy ratio 9.2 9.5 9.8 10.0 10.4 10.2 11.3

Liquidity

for domestic institutions(f)

Credit-to-deposit ratio 112.9 119.3 123.7 122.6 125.1 130.1 134.9

Coverage ratio of interbank liabilities by highly liquid assets 86.8 93.4 98.9 123.9 136.3 127.3 132.1

Liquidity gap (as a percentage of total assets deducted from liquid assets)

up to 3 months - -3.5 -3.4 0.5 0.7 0.6 0.0

up to 1 year - -7.8 -7.6 -6.5 -4.8 -5.4 -6.6


Notes: End-of-period values, except for profitability indicators, which refer to the whole year. (a) Series break in 2004 due to the introduction of the IAS. For information on data used for 2005 and, on a comparable basis, for 2004, refer to Financial Stability Report , 2005, Banco de Portugal. (b) The figures in brackets are adjusted

for employer costs related to retirement pensions and other post-employment benefits. (c) Ratio of provisions for none performing loans and for credit and interest overdue on total credit. (d) Comprised by credit and interest overdue for more than thirty days. (e) Credit quality indicator defined according to Instruction of Banco de

Portugal no. 16/2004. It corresponds to the ratio of credit overdue, net of provisions for credit overdue and for credit considered to be doubtful. Non-performing loans include credit overdue for more than ninety days and credit considered to be doubtful, reclassified as credit overdue for provisioning purposes, in accordance with no-

tice of Banco de Portugal no. 3/95. (f) Institutions whose management control is held by residents.

Total assets of the group of institutions considered in the analysis increased, reflecting the strong

growth of credit to the non-financial private sector (around 8 per cent) and the increasingly important

role played by subsidiaries abroad of Portuguese banking groups in the overall activity of the system

(Table 7.6).25

However, the change in total assets was also influenced by the adoption of the IAS, since

changes in the value of financial assets and liabilities are more rapidly passed through to banks’

balance sheets.

One noteworthy feature in the overall activity of the system is the high growth of loans to households

for house purchase. Against the background of low interest rates, the access to this lending has bene-

fited from particularly favourable conditions provided by banks, such as the narrowing in interest rate

margins and the lengthening of loan maturities (see “Section 1 of Chapter 2 The monetary policy of the

ECB and monetary and financial conditions of the Portuguese economy”). The number of loan con-

tracts for house purchase in 2005 rose by approximately 8 per cent from the previous year, while the to-

tal contracted amount increased by 16 per cent. These developments reflect a significant increase in

the average value per contract (around 7.5 per cent). On the contrary, the average value of bank evalu-

ation on housing grew close to inflation for most house segments. This suggests that the average loan

to value ratio and/or the share of houses with either higher quality or larger size in the total housing pur-

chased with credit has increased. It should be noted that higher loan-to-value ratios, per se, would

raise institutions’ exposure to credit risk. However, as counterparts to this procedure, banks are likely

to have required higher collateral and widened interest rate spreads.

Against the background of weak business investment and moderate developments of house prices

(that suggest the absence of relevant speculative pressures in the housing market), bank credit has

been particularly concentrated in the housing segment, with lower risk (as it is backed by real collat-

eral) and, therefore, lower costs in terms of capital requirements when compared to the other seg-

ments. Actually, bank lending to households for other purposes than house purchase and to

non-financial corporations has showed more moderate growth rates.26

However, the importance of

banks as lenders to non-financial corporations via the acquisition of debt securities issued by the latter

(in particular commercial paper) went beyond that shown by the change in loans granted. The average

quality of credit portfolio in the banking system – assessed by both credit default and credit

provisioning indicators � developed favourably in 2005. To some extent, this has reflected the supply

by banking institutions of more flexible contractual modalities in order to better adjust them to the

current capacity of their customers to meet the respective debt service.

In parallel to the strong expansion of credit granted and to relatively moderate growth of resources

from customers, Portuguese banking groups have continued to issue large amounts of debt securities

through their branches and subsidiaries abroad. The recourse to the interbank money market has also

increased, in particular by non-domestic institutions.27

In 2005 gross issuance of securities via

branches and subsidiaries abroad has been again very high benefiting from the favourable conditions

in international debt markets (Chart 7.17 and 7.18). A significant part of this new issuance was used to

replace debt matured in the meantime. Therefore the residual maturity of outstanding bonds issued by

branches and subsidiaries abroad increased. Credit securitisation operations also remained signifi-



134

(25) The significance of the activity of non-resident institutions integrating the consolidation perimeter of the Portuguese banking system may be inferred by the

growth in net credit to customers (approximately 10 per cent), higher than that in credit granted to the resident non-financial private sector (the market share

in this aggregate of the group of institutions considered in the analysis remained virtually unchanged vis-à-vis 2004). 252525252525252525252525

(26) The year-on-year growth rates of loans granted by resident financial institutions to households for other purposes than house purchase and to non-financial

corporations, adjusted for securitisation operations made through non-resident vehicles, stood at around 5 per cent.

(27) In effect, a significant share of the increase in interbank activity of the system was concentrated on the group of institutions belonging to non-resident

banking groups. In particular, the increase in interbank liabilities was largely associated with the restructuring process of a banking group, which opted for

the early repayment of a large amount of bonds. This early redemption was partly offset by an increase in interbank market funding, including funding

obtained from central banks.



135

Table 7.6

BANKING SYSTEM BALANCE SHEET(a)

On a consolidated basis

EUR millions

Structure (as a percentageof total assets)

Rate ofchange %

2004 2005 2004 2005

Cash and claims on central banks 7 555 6 205 2.8 2.0 -17.9

Claims on other credit institutions 3 338 3 239 1.2 1.1 -3.0

Investment in credit institutions 21 703 27 666 8.0 9.1 27.5

Net credit to customers 194 873 213 945 71.5 70.1 9.8

Financial assets at fair value through results 12 900 18 160 4.7 5.9 40.8

Available-for-sale financial assets 14 806 14 185 5.4 4.6 -4.2

Investment held to maturity 520 718 0.2 0.2 38.0

Hedging derivatives 692 814 0.3 0.3 17.5

Investment in subsidiaries 2 613 3 470 1.0 1.1 32.8

Tangible and intangible assets 3 611 3 895 1.3 1.3 7.9

Other assets 9 799 13 068 3.6 4.3 33.4

Total assets 272 411 305 363 100 100 12.1

Resources from central banks 3 542 6 215 1.3 2.0 75.5

Resources from other credit institutions 33 315 38 740 12.2 12.7 16.3

Resources from customers and other loans 142 784 149 142 52.4 48.8 4.5

Financial liabilities at fair value through results 2 589 4 460 1.0 1.5 72.3

Liabilities represented by securities 55 694 63 006 20.4 20.6 13.1

Subordinated debt 9 887 9 873 3.6 3.2 -0.1

Hedging derivatives 562 1 000 0.2 0.3 77.8

Liabilities on account of assets not derecognised - 2 363 - 0.8 n.d.

Other liabilities 10 013 12 876 3.7 4.2 28.6

Total liabilities 258 386 287 674 94.9 94.2 11.3

Capital 14 025 17 689 5.1 5.8 26.1

of which: Net profit/loss for the year 1 284 2 202 0.5 0.7 71.4

Total liabilities and net situation 272 411 305 363 100 100 12.1

PROFIT AND LOSS ACCOUNT(a)

Consolidated basis

EUR millions

Structure (as a percentageof total assets)

Rate ofchange %

2004 2005 2004 2005

1. Interest and comparable income 12 622 13 975 4.6 4.6 10.7

2. Interest and comparable costs 7 504 8 591 2.8 2.8 14.5

3. Financial margin (1-2) 5 119 5 384 1.9 1.8 5.2

4. Income from capital instruments 161 217 0.1 0.1 34.4

5. Net income from services and commissions 1 923 2 213 0.7 0.7 15.1

6. Profit/loss on financial assets/liabilities measured at fair

value

346 440 0.1 0.1 27.3

7. Available-for-sale financial assets 104 645 0.0 0.2 521.4

8. Profit/loss on foreign exchange revaluation 208 53 0.1 0.0 -74.5

9. Profit/loss on the sale of other financial assets 72 259 0.0 0.1 257.5

10. Other net operating profit/loss 602 429 0.2 0.1 -28.7

11. Gross income (3+4+5+6+7+8+9+10) 8 535 9 640 3.1 3.2 12.9

12. Staff costs 3 667 3 301 1.3 1.1 -10.0

13. Overall administrative costs 1 891 1 978 0.7 0.6 4.6

14. Depreciation for the year 562 466 0.2 0.2 -17.2

15. Provisions net of refunds and write-offs 279 206 0.1 0.1 -26.3

16. Impairment losses and other net value adjustments 1 012 1 066 0.4 0.3 5.3

17. Negative consolidation differences 0 0 0.0 0.0 -100.0

18. Appropriation of results of associated companies and joint

undertakings (equity method)

624 363 0.2 0.1 -41.8

19. Income before taxes and minority interests

(11-12-13-14-15-16-17+18)

1 748 2 987 0.6 1.0 70.9

20. Taxes on profit for the year 228 402 0.1 0.1 76.3

21. Income before minority interests (19-20) 1 520 2 585 0.6 0.8 70.1

22. Minority interests (net) 236 383 0.1 0.1 62.2

23. Profit/loss for the year (net) (21-22) 1 284 2 202 0.5 0.7 71.5


Note: (a) Data on institutions that adopted the International Accounting Standards and the Adjusted Accounting Standards.

cant in 2005.28

At the end of the year, securitised credit to the non-financial private sector accounted

for 8 per cent of credit originally granted by the banking system.

Similarly to previous years, resources from customers grew at a relatively weak pace, and its impor-

tance as a financing source of the banking system continued to decline. In addition to the falling house-

hold savings rate, this also reflects the large variety of investment products made available by

Portuguese banks to their customers. Part of these products are not registered in the balance sheets

of institutions within the consolidation perimeter of banking groups (as the case of mutual funds and in-

surance corporations), even though they contribute very significantly to the earnings of the banking

system, through commissions and other fees charged. In 2005 net accumulation by the non financial

private sector of assets issued by financial institutions not included in the banking system accounted

for almost 7 per cent of GDP, increasing by nearly 4 percentage points from the previous year.29

Also worth mentioning is the expressive increase in interbank activities (including claims on and re-

sources from central banks), particularly in the case of institutions that belong to non-resident banking

groups. To a large extent, this increase reflects changes in intra-group financing strategies, that do not

imply a modification in the general financing profile followed by the Portuguese banking system. The



136


SPREADS OF SUBORDINATED SECURITIES

ISSUED BY EUROPEAN BANKS (DENOMINATED IN

EURO) TREASURY BONDS

GROSS INTERNATIONAL BOND ISSUANCE BY

BRANCHES AND SUBSIDIARIES ABROAD OF

PORTUGUESE BANKING GROUPS

By original maturity

20

70

120

170

220

270

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05

Basis

poin

ts

Spread on banks’ subordinated securities – Tier I (a)Spread on banks’ subordinated securities – upper Tier II (a)Spread on banks’ subordinated securities – lower Tier II (a)

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005

EU

Rb

illio

n

over 10 years or perpetual bonds

5 to 10 years

2 to 5 years

up to 2 years

Sources: Bloomberg and JP Morgan

Note: (a) According to taxonomy defined by the Basle Committee in “International conver-

gence of capital measurement and capital standards”, July 1988. “Upper Tier II” refers to

instruments that, although not eligible as “Tier I” have undefined maturities or are perpetu-

ities. In general “Lower Tier II” refers to instruments eligible as own funds with defined ma-

turity.

Sources: Bloomberg, Dealogic Bondware and Thomson Financial Datastream.

(28) The adoption of the IAS implied changes in the accounting of credit that was securitisated, simultaneously introducing more severe criteria for total

derecognition of securitised assets. Such derecognition will only occur in situations of total sale of rights and obligations related to the securitised assets. As

a result, non-derecognised securitised credit continues to be included in the credit portfolio of banks. The counterpart to the liquidity proceeded from the

securitisation operation will be a liability vis à vis the securitisation vehicle. In addition, IAS envisage the consolidation of special-purpose vehicles within

their financial group whenever the latter had effective control. In such cases, when the securitisation vehicles are consolidated within the respective banking

group, these counterpart liabilities are replaced by liabilities for the issuance of securities.

(29) This corresponds to the sum of net change in financial assets of households and non-financial corporations concerning “mutual funds shares” and “life

insurance”; i.e., financial instruments issued by mutual funds and insurance corporations. Including deposits of the non-financial private sector (whose total

change was virtually nil, albeit those issued with resident institutions have grown by almost 6 per cent, concentrated at the end of the year), the net

accumulation of these assets reached 9.5 per cent of GDP in 2005. At the end of year, at least 30 per cent of the financial wealth of the non-financial private

sector invested in these three instruments was not included in the balance sheet of the banking system on a consolidated basis.

increase in interbank liabilities translated into some worsening of most liquidity indicators for the group

of institutions considered (mainly in the case of non-domestic institutions).

The adoption of the IAS would mechanically imply changes in measuring the solvency of banks, in par-

ticular as regards the calculation of own funds. With a view to mitigating the impact of the change in the

accounting system on the external evaluation of the risk profile of the institutions, Banco de Portugal is-

sued a set of new rules on the calculation of own funds and own fund requirements (the so-called “pru-

dential filters”).30

In addition, the Bank allowed for the inclusion of provisions for general credit risks in

additional own funds. The effect of these changes on the overall adequacy ratio of own funds should

not be very significant, albeit resulting in a change in the composition of own funds, since the impact

will be positive on additional own funds and negative in terms of original own funds. At the end of 2005,

the overall adequacy ratio of own funds of the banking system stood slightly above 11 per cent, keep-

ing the gradual improvement path observed since 2001. This increase was chiefly due to the rise in ad-

ditional own funds (associated with the inclusion of provisions for general credit risks and with the

issuance of a significant amount of equity by one of the main institutions of the system), whereas origi-

nal own funds rose very slightly. The negative impact of accounting and regulatory changes on original

own funds was therefore fully offset by the significant growth in paid-up capital of some institutions.

Own fund requirements increased less than own funds, reflecting the change in credit granted and its

predominance in loans for house purchase.

Institutional Investors31

In 2005 the flow of savings towards institutional investors was particularly expressive, accounting for

approximately 9 per cent of GDP (almost 4 per cent of GDP in 2004). On the one hand, this reflected

better yield opportunities provided by products issued by mutual funds and insurance corporations as

compared to the negative real return of most deposit investments. On the other hand, the strategy fol-

lowed by some banks to channel investments of their customers, usually with high savings, to these

products (typically issued by institutions linked to the same economic group but not consolidating

within the banking group) also supported that development. In the year under review, demand for in-

vestments managed by institutional investors was also boosted by the implementation of the Directive

on taxation of savings that has a special bearing on emigrants’ investments.

Reflecting developments in financial markets, return rates on mutual funds were rather mixed in 2005.

Return increased significantly in most equity-linked funds, mirroring the stock market gains, whereas

return in bond funds was slightly below the level observed in the previous year. In turn, rates of return in

money market and real estate funds were broadly the same as in 2004 (Chart 7.19).

In 2005 the net subscription of mutual fund units increased sharply, by almost three times from the pre-

vious year (Table 7.7). In particular, flows to special investment funds and to flexible funds remained

high, representing jointly 45 per cent of total net subscription in the year. Net subscriptions of

bond-linked harmonised funds were also significant, weighting more than 35 per cent on the total. In

turn, legislative changes intended to discontinue tax incentives in retirement-saving schemes in 2005

should not have been reflected in the subscription of investment funds with such characteristics,

whose net subscription in the year represented approximately 10 per cent of the total (contrary to what

was seen in stock-savings schemes, which recorded net redemptions). In contrast to the significant



137

(30) For a more detailed description of these changes, see “Section 7.1.5 Reviewing prudential regulations in the context of the new accounting standards”,

Financial Stability Report, 2004, Banco de Portugal.3030303030303030303030303030303030303030303030

(31) Institutional investors shall be the entities with special competence and expertise in asset management, whose major task is to invest large amounts of

funds, being usually subject to specific regulations and supervision. This section refers in particular to collective investment undertakings (mutual funds and

real estate funds), insurance corporations and pension funds.

amounts raised by mutual funds, net holdings in money market funds were more modest. All in all, fi-

nancial assets managed by investment funds increased noticeably by nearly 15 per cent. Nonethe-

less, the structure of their portfolio did not change significantly and the large weight of bonds was



138

Table 7.7

FUNDS RAISED BY RESIDENT INSTITUTIONAL INVESTORS

EUR millions

2000 2001 2002 2003 2004 2005 31 Dec-2005

Outstanding

amounts

Total n.a. 5 595 5 706 5 235 5 594 12 866 90409

Pension funds(a)

Net contributions(b)

840 1 704 2 073 815 1 239 2 770 18901

Life insurance(a)

Net contributions 2 195 2 854 2 325 2 178 2 397 6 098 33689

Investment funds(c)

Net subscriptions:

Money market funds n.d. 54 501 385 5 15 1105

Mutual funds n.d. 304 36 1 197 1 016 3 024 27694

Real estate funds n.d. 678 770 660 938 958 9020

Memo:

Deposits of the resident non-monetary

sector(d)

10 775 6 943 1 344 1 983 4 665 12 791 162649

Savings certificates 1 177 1 071 793 318 49 343 16246


Notes: (a) The amount outstanding in December 2005 corresponds to the technical reserves of insurance corporations and pension funds, as a measure of the liabilities associated with

life insurance instruments in the insurance sector and with the payment of pensions. Net contributions are proxied by the change in the abovementioned technical reserves. (b) Figures for

2003 and 2004 are adjusted for the transfer of assets from publicly-owned companies to Caixa Geral de Aposentações. In 2003, it included the transfer of the Post Office fund (€1,300 mil-

lion) and in 2004 the transfers involved Caixa Geral de Depósitos (€2,504.4 million), Navegação Aérea de Portugal (€235.7 million), Aeroportos de Portugal (€173.6 million) and Imprensa

Nacional Casa da Moeda (€137.8 million). (c) Data are not adjusted for mutual fund units held by residents. (d ) In Portugal and abroad.

Chart 7.19

INVESTMENT FUND YIELDS PORTFOLIO OF MUTUAL FUNDS AND MONEY

MARKET FUNDS

Development and structure by type of assets

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005

Pe

rce

nt

Mutual fund (excluding high liquidity funds)

Money market and other high liquidity funds

Real-estate funds

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005

Pe

rce

nt

0

6

12

18

24

30

EU

Rb

illio

n

Shares and other equity - non-resident issuersShares and other equity - resident issuersSecurities other than shares - non-resident issuersSecurities other than shares - resident issuersCurrency and depositsTotal assets (RHS)

Source: APFIPP.

Note: Yields were calculated on the basis of 12-month yields of investment funds gener-

ated by management companies that are members of the APFIPP, which nonetheless

represent nearly all funds.


Note: Data were adjusted for mutual fund units held by other funds.

Chart 7.20

maintained (approximately 75 per cent of the total), whereas shares increased slightly to the detriment

of deposits and inter-fund holdings (Charts 7.20 ad 7.21).

As mentioned above, investments in savings products in the form of life insurance increased consider-

ably in 2005, which was largely associated with the implementation of the Directive on taxation of sav-

ings. Also, the amounts managed by pension funds increased significantly (Chart 7.22). This increase

was chiefly due to extraordinary contributions from banks to pension funds, as a result of the changes

in liabilities for the payment of their workers’ pensions in the wake of the IAS adoption. Pension funds

correspond basically to private social security schemes, differing from public social security schemes

because they must ensure, at any moment, appropriate provisioning of liabilities for the payment of

pensions of the respective beneficiaries. Therefore, inflows are particularly affected by changes in ac-

counting rules and in actuarial assumptions used to valuate pension fund liabilities, such as the

adoption of the IAS.

The adoption of the IAS had also a relevant impact on insurance corporations and pension funds,

namely as regards the discount rate of the respective liabilities. This seems to have influenced de-

mand by these institutions for long-term securities, in order to better match the duration of their portfo-

lios to the duration of their liabilities. As a result, investment flows of insurance corporations and

pension funds in long-term securities issued by non-residents (predominantly euro area residents)

increased very significantly in 2005.



139


PORTFOLIO OF REAL-ESTATE FUNDS


PORTFOLIO OF PENSION FUNDS


0

20

40

60

80

100

2000 2001 2002 2003 2004 2005

Pe

rce

nt

0

2

4

6

8

10

EU

Rb

illio

n

OtherReal-estate and similar holdingsTotal assets (RHS)

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005

As

ap

erc

en

tag

eo

fth

eto

tal

0

4

8

12

16

20

EU

Rb

illio

n

Currency, deposits and other assets Debt securities

Shares and other equity Investment fund units

Real-estate Total assets (RHS)

Source: Banco de Portugal. Source: Instituto de Seguros de Portugal .



140

Box 7.1. Financial Intermediation Margin in Portugal

Financial intermediation consists in channelling funds from capital holders (or savers) to those who need them to fi-

nance investment projects or consumption expenditure. In any financial system where banks predominate in the

intermediation of financial flows in the economy, the differential between the interest rate on loans to the non-finan-

cial private sector and the interest rate applicable to bank deposits (intermediation margin) is a measure of the unit

cost of financial intermediation in the economy and of the efficiency of the financial system. This is not a measure of

the overall margin enjoyed by banks, since it only considers the activity carried out with customers, therefore ex-

cluding income and expenses associated with interbank activity, liabilities represented by securities and securities

held in portfolio.1

The process of financial liberalisation in developed economies over the last 15 to 20 years led, with no exception,

to a narrowing of the intermediation margin, particularly apparent in the Portuguese case. Changes to the institu-

tional and regulatory framework that started in the mid-1980s and grew during the 1990s, paved the way for the op-

eration of banking institutions in an environment conducive to competition. Among the changes occurred in that

period, the liberalisation of conditions for access to banking activity, the dismantling of administrative restrictions to

the expansion of the banking network, to the setting of interest rates and to the expansion of credit through credit

ceilings, as well as the privatisation process, which restored the control of most banking activities to private initia-

tive are worth mentioning. The new competitive framework introduced incentives to innovation and to the introduc-

tion of more efficient technologies conducive to increased productivity, as well as to the elimination of

redundancies in the allocation of resources. The decline in administrative costs resulting from this process has

passed through to the interest rates applied by institutions and is reflected in narrower intermediation margins. In

addition to administrative costs, banks are subject to implied costs due to regulation (among which the costs in-

duced by the minimum reserve system) and incorporate the expected losses from default risk in the interest rates

on loans granted. Both types of costs showed significant declines in the period under review.

Chart 1 presents developments in the intermediation margin in Portugal from 1990 to 2005 and a breakdown into

deposit and credit markets. The deposit market component is split into two additional items. One of them isolates

the gross margin received by banks in time deposits, calculated as the differential between the 3-month money

market interest rate and the average rate paid in such deposits, while the other one shows the remaining part,

which is the contribution of overnight deposits. The reason behind the breakdown into overnight and time deposits

relates to the fact that the former were chiefly associated with the provision of payment and/or liquidity services,

whose remuneration is very low and less sensitive to interbank market interest rates, whereas the latter are used to

place savings and, as such, the respective remuneration tends to reflect the interest rates prevailing in competitive

markets with equivalent maturities. The credit market margin was calculated symmetrically to the time deposit mar-

gin by the differential between the average rate on loans and the 3-month interbank money market rate.

Since the early 1990s the bank intermediation margin in Portugal narrowed by approximately 10 percentage

points, to stand at around 3 per cent in 2005 (Chart 1). It narrowed by approximately 6 percentage points in the de-

posit market and by around 4 percentage points in the credit market. This decline was partly associated with the de-

crease in unit administrative costs during that period, resulting from the technological changes in the sector and

from the considerable growth of intermediation activity. These changes were fostered by competitive pressures

and involved the automation of procedures in the relationship with the customer in the distribution of financial ser-

vices, namely through an increase in auto-service means or in remote-delivery services (Chart 2).

Over a period before the end of 1996, the narrowing of the intermediation margin was almost exclusively due to the

deposit market, in particular the overnight deposit segment, but also, albeit more irregularly, to the reduction of time

deposits’ margin. The replacement of credit ceilings by market-based liquidity control in 1991, as well as the dis-

mantling of the remaining administrative restrictions to interest rate setting in May 1992, were decisive for the nar-

rowing of the deposit margin in this period. Indeed, restrictions to credit growth imposed by credit ceilings limited

incentives to competition in collecting deposits, since banks had at their disposal a rather wide liquidity base that

(1) The development of the differential between the implied rates of return of banks’ interest-bearing assets and liabilities can be observed in Table 6.2.1 of the 2004 Financial Stability

Report. This differential stood at approximately 1.4 percentage points in 2004, compared with about 3 per cent for the differential between credit and deposits of the non-financial

private sector, the intermediation margin concept under review in this Box.



141

was only in part adequately remunerated.2

In addition, the erosion of the contribution of overnight deposits, which

attained 3.5 percentage points in 1990, was to a large extent related to the decline in the interbank market interest

rate, reflecting the abovementioned low sensitivity of rates on overnight deposits to interbank rates (Chart 3). This

effect is partly mechanical and accounts for the implied cost born by the economy for the use of bank account

domiciliation, maintenance and management services and payment services. The historically low interest rates ob-

served as of mid-2003 lowered the implied revenue associated with overnight deposits to its minimum level, and

their contribution to the intermediation margin dropped to 0.6 percentage points in 2005. By contrast, this revenue

loss which traditionally funded the provision of the abovementioned overnight deposit-related services has been

gradually offset by explicit fees collected for such services that were previously provided free of charge or at prices

that did not reflect the respective cost.

If remunerated at an interest rate lower than market rates, the building-up of reserves is also a cost for banks. In

Portugal, a new minimum reserve system entered into force from 1991 to 1994, representing 17 per cent of the de-

posit base and with a non-linear average remuneration rate that during this period corresponded to approximately

half the three-month money market interest rate. The estimated cost of this system corresponds, in annualised

terms, to approximately 1.9 per cent per unit of deposits collected by the system in 1991/1992, gradually declining

to around 0.7 percentage points in October 1994. More recently, the minimum reserve system plays a virtually neu-

tral role from this perspective, given that the deposits outstanding with the central bank, corresponding to 2 per cent

of the incidence base, are fully remunerated at market rates.

In turn, the credit market margin was somewhat volatile up to the mid-1990s, and decreased sharply from 1996 to

1999, which is consistent with the increased competition associated with the decline in market interest rates in the

second half of the 1990s and with significantly less intensive default in the credit market (Chart 4). If on the one

hand the transition to EMU occurred within a context of strong growth of economic activity, which was benign for

credit quality, on the other hand, it represented a structural change in the economic regime, which is now character-

ised by low and stable inflation. This means that part of the decline in credit risk assumed by banks, and as a result

of the credit market margin, may be interpreted as permanent. This was also the period when, as a result of the ac-

celeration in the volume of intermediation activity, banks obtained the highest reductions in unit average adminis-

trative costs. Simultaneously, the systems at the disposal of the banks for the assessment, monitoring and

management of credit risk faced unprecedented improvements in the same period. This has enabled banks to es-

tablish more efficient criteria for the approval of credit, to better discriminate the quality of credit granted and the in-

Chart 1 Chart

FINANCIAL INTERMEDIATION MARGIN INTERMEDIATION MARGIN AND ADMINISTRATIVE

COSTS

0

2

4

6

8

10

12

14

Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05

Pe

rce

nta

ge

po

ints

Contribution of overnight deposits

Time deposit margin (c)

Credit margin (b)

Total (a)

2

3

4

5

6

7

8

9

Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05

Pe

rce

nta

ge

po

ints

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

Pe

rce

nt

Intermediation margin (excluding overnight deposits)

Unit administrative costs (RHS)

Source: European Banking Federation and Banco de Portugal .

Notes: (a) Differential between the average interest rate on loans and deposits of the

non-financial private sector. (b) Differential between the average interest rate on loans

and the three-month money market interest rate. (c) Differential between the three-month

money market interest rate and the average interest rate on time deposits.


Note: Unit administrative costs are calculated as the ratio of administrative costs to the

volume of intermediation activity. Financial intermediation imputed costs were fixed at 70

per cent of total administrative costs of the banking system, which is the proxied average

weight of the financial margin of gross income in the sample. The volume of activity corre-

sponds to the average between credit granted and resources from customers.

(2) The end of credit ceilings was also almost immediately reflected on price formation in the credit market, making it possible to obtain a wider interest rate differentiation in the credit

market among customers with different risk levels.



142

terest rate applied, and to implement more diligent credit recovery procedures. After 1999, the swings observed in

the credit market margin evolved hand-in-hand with the economic cycle and, as can be observed in Chart 4, were

in line with the developments of default indicators.

Also, in the period after 1999, developments in the credit margin were similar in non-financial corporation and

household sectors up to mid-2002. In particular, margins in loans for house purchase and loans to non-financial

corporations stood at very close levels in that period. As a result, the deterioration in the cyclical situation was as-

sociated with a persistent widening of the margin in segments such as consumer credit and other lending to individ-

uals and loans to non-financial corporations, in contrast to developments in loans for house purchase, whose

margin narrowed after 2002 (Chart 5). This divergence is the result of the fact that, in view of the collateral associ-

ated to this latter segment and of the perception that there is no speculative bubble in the real-estate market, loans

for house purchase are usually deemed to pose less risk and, therefore, banks have incentives to reinforce the

weight of these loans on total portfolio in periods when the economic environment is unfavourable in terms of credit

quality.

Chart 3

MARKET INTEREST RATE AND INTERMEDIATION

MARGIN

0

1

2

3

4

Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05

Pe

rce

nta

ge

po

ints

0

6

12

18

24

Pe

rce

nt

Contribution of overnight deposits to theintermediation margin

Money market interest rate (RHS)

Sources: European Banking Federation and Banco de Portugal .

Chart 4 Chart

BANK CREDIT MARGIN AND DEFAULT CREDIT MARGINS PER MARKET SEGMENT

0

2

4

6

8

Mar-96 Mar-99 Mar-02 Mar-05

Pe

rce

nta

ge

po

ints

0.0

0.5

1.0

1.5

2.0

Pe

rce

nt

Margin in the credit market

Credit and interest overdue for less than 1year as a percentage of credit (RHS)

0

1

2

3

4

5

6

7

8

9

10

Mar-96 Mar-99 Mar-02 Mar-05

Pe

rce

nta

ge

po

ints

Loans (including overdraft facilities) to non-financial corporations

Loans (including overdraft facilities) to householdsfor consumer credit and other lending

Loans to households for house purchase

Sources: European Banking Federation and Banco de Portugal . Sources: European Banking Federation and Banco de Portugal .

SUPPLEMENTARY TABLES

Supplementary

Tables

An

nual

Rep

ort

2005

|B

ancodePortugal

145

Table A.1.1

WORLD ECONOMY – GROSS DOMESTIC PRODUCT

Real rate of change

Per cent

Weight in world

GDP(a)

1997 1998 1999 2000 2001 2002 2003 2004 2005

World economy(b)

100.0 4.3 2.8 3.7 4.8 2.6 3.1 4.1 5.3 4.8

Advanced economies 52.3 3.4 2.6 3.4 3.9 1.2 1.6 2.0 3.3 2.7

United States 20.1 4.5 4.2 4.4 3.7 0.8 1.6 2.7 4.2 3.5

Japan 6.4 1.4 -1.9 -0.1 2.9 0.4 0.1 1.8 2.3 2.6

United Kingdom 3.0 3.2 3.2 3.0 4.0 2.2 2.0 2.5 3.1 1.8

Newly industrialised Asian economies 3.2 5.6 -2.4 7.4 7.9 1.1 5.3 3.2 5.8 4.6

Euro area(c)

14.8 2.6 2.8 2.9 4.0 1.9 1.0 0.7 1.8 1.4

Germany 4.1 1.9 1.8 1.9 3.5 1.4 0.1 -0.2 1.1 1.2

France 3.0 2.1 3.3 3.0 4.1 1.8 1.1 1.1 2.0 1.2

Italy 2.7 2.0 1.3 1.9 3.8 1.7 0.3 0.1 0.9 0.1

Spain 1.8 3.9 4.5 4.7 5.0 3.5 2.7 3.0 3.1 3.4

Netherlands 0.8 3.8 4.4 4.0 3.5 1.4 0.1 -0.1 1.7 1.1

Belgium 0.5 3.3 1.9 3.1 3.8 1.1 1.5 0.9 2.6 1.2

Austria 0.5 1.8 3.6 3.4 3.3 0.8 1.0 1.4 2.4 1.9

Greece 0.4 3.6 3.3 3.5 4.5 5.1 3.8 4.8 4.6 3.7

Portugal 0.3 4.2 4.7 3.9 3.9 2.0 0.8 -1.2 1.1 0.3

Finland 0.3 6.2 5.0 3.4 5.0 1.0 2.2 2.4 3.6 2.1

Ireland 0.3 11.7 8.6 10.8 9.2 6.1 6.1 4.4 4.5 4.7

Luxembourg 0.1 5.9 6.5 8.4 8.4 2.5 3.6 2.1 4.2 4.2

Emerging market and developing economies 47.7 5.4 3.1 4.1 6.1 4.4 5.1 6.7 7.6 7.2

Developing Asian countries 27.1 6.7 4.3 6.3 7.0 6.1 7.0 8.4 8.8 8.6

China 15.4 9.3 7.8 7.1 8.4 8.3 9.1 10.0 10.1 9.9

Latin America(d)

7.4 5.2 2.3 0.5 3.9 0.5 0.0 2.2 5.6 4.3

Brazil 2.6 3.3 0.1 0.8 4.4 1.3 1.9 0.5 4.9 2.3

Community of Independent States 3.8 1.2 -3.5 5.2 9.0 6.3 5.3 7.9 8.4 6.5

Central and Eastern Europe 3.3 4.2 2.9 0.6 5.0 0.3 4.4 4.7 6.5 5.3

Africa 3.3 3.2 2.8 2.6 3.1 4.2 3.6 4.6 5.5 5.2

Middle East 2.8 4.5 3.9 2.0 5.4 3.2 4.3 6.6 5.4 5.9

Memo:

European Union (EU25) 20.3 2.7 3.0 3.0 3.9 1.9 1.2 1.2 2.4 1.6

Sources: European Commission, Eurostat, IMF, INE, Thompson Financial Datastream, and Banco de Portugal.

Notes: (a) Based on GDP valued at purchasing power parities. (b) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. (c) Adjusted for seasonal and calendar effects for the euro area and the four major economies. (d) Corresponds to the aggregate “Western Hemisphere” defined by the

IMF.

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Table A.1.2

WORLD ECONOMY – CONSUMER PRICES

Rate of change

Per cent

Weight in world

GDP(a)

1997 1998 1999 2000 2001 2002 2003 2004 2005

World economy(b)

100.0 5.9 5.4 5.0 4.3 4.0 3.4 3.6 3.7 3.8

Advanced economies 52.3 2.0 1.5 1.4 2.2 2.1 1.5 1.8 2.0 2.3

United States 20.1 2.3 1.5 2.2 3.4 2.8 1.6 2.3 2.7 3.4

Japan 6.4 1.7 0.6 -0.3 -0.9 -0.7 -0.9 -0.3 0.0 -0.3

United Kingdom 3.0 1.8 1.6 1.3 0.8 1.2 1.3 1.4 1.3 2.0

Newly industrialised Asian economies 3.2 3.3 4.4 0.0 1.1 1.9 0.9 1.4 2.4 2.2

Euro area(c)

14.8 1.6 1.1 1.1 2.1 2.3 2.2 2.1 2.1 2.2

Germany 4.1 1.5 0.6 0.6 1.4 1.9 1.4 1.0 1.8 1.9

France 3.0 1.3 0.7 0.6 1.8 1.8 1.9 2.2 2.3 1.9

Italy 2.7 1.9 2.0 1.7 2.6 2.3 2.6 2.8 2.3 2.2

Spain 1.8 1.9 1.8 2.2 3.5 2.8 3.6 3.1 3.1 3.4

Netherlands 0.8 1.9 1.8 2.0 2.3 5.1 3.9 2.2 1.4 1.5

Belgium 0.5 1.5 0.9 1.1 2.7 2.4 1.6 1.5 1.9 2.5

Austria 0.5 1.2 0.8 0.5 2.0 2.3 1.7 1.3 2.0 2.1

Greece 0.4 5.4 4.5 2.1 2.9 3.7 3.9 3.4 3.0 3.5

Portugal 0.3 1.9 2.2 2.2 2.8 4.4 3.7 3.3 2.5 2.1

Finland 0.3 1.2 1.3 1.3 2.9 2.7 2.0 1.3 0.1 0.8

Ireland 0.3 1.3 2.1 2.5 5.3 4.0 4.7 4.0 2.3 2.2

Luxembourg 0.1 1.4 1.0 1.0 3.8 2.4 2.1 2.5 3.2 3.8

Emerging market and developing economies 47.7 11.3 11.1 10.1 7.1 6.6 5.8 5.8 5.7 5.4


China 15.4 2.8 -0.8 -1.4 0.4 0.7 -0.8 1.2 3.9 1.8

Latin America(d)

7.4 11.9 9.0 8.2 7.6 6.1 8.9 10.5 6.5 6.3

Brazil 2.6 6.9 3.2 4.9 7.1 6.8 8.4 14.8 6.6 6.9

Community of Independent States 3.8 18.0 23.9 69.6 24.6 20.3 13.8 12.0 10.3 12.3

Central and Eastern Europe 3.3 51.7 32.7 23.0 22.8 19.4 14.7 9.2 6.1 4.8

Africa 3.3 13.7 9.3 11.9 13.6 12.7 9.9 10.8 8.1 8.5

Middle East 2.8 8.6 8.3 8.4 5.9 5.5 6.3 7.1 8.4 8.4

Memo:

European Union (EU25) 20.3 2.6 2.1 1.6 2.4 2.5 2.1 1.9 2.1 2.2

Sources: IMF, Eurostat, Thompson Financial Datastream, INE and Banco de Portugal.

Notes: (a) Based on GDP valued at purchasing power parities. (b) Details about country aggregates and aggregation methodology can be obtained in www. imf.org. (c) Harmonised Index of Consumer Prices. (d) Corresponds to the aggregate “Western Hemisphere” defined by the IMF.

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Table A.1.3

WORLD ECONOMY – CURRENT ACCOUNT


Weight in world

GDP(a)

1997 1998 1999 2000 2001 2002 2003 2004 2005

Advanced economies(b)

52.3 0.3 0.1 -0.5 -1.1 -0.9 -0.9 -0.7 -0.9 -1.5

United States 20.1 -1.7 -2.4 -3.2 -4.2 -3.8 -4.5 -4.7 -5.7 -6.4

Japan 6.4 2.3 3.1 2.6 2.6 2.1 2.9 3.2 3.8 3.6

United Kingdom 3.0 -0.2 -0.5 -2.7 -2.6 -2.2 -1.6 -1.4 -2.0 -2.6

Newly industrialised Asian economies 3.2 0.6 7.4 5.8 3.5 4.7 5.1 6.9 7.0 6.0

Euro area(c)

14.8 - - - - -0.3 0.8 0.5 0.6 -0.4

Germany 4.1 -0.5 -0.7 -1.2 -1.6 0.0 2.2 2.1 3.7 3.9

France 3.0 2.5 2.3 2.5 1.1 1.2 0.8 0.2 -0.7 -1.2

Italy 2.7 2.9 1.9 1.0 -0.1 0.3 -0.3 -0.9 -0.5 -1.1

Spain 1.8 0.2 -1.2 -2.7 -4.0 -4.3 -3.7 -4.1 -5.8 -7.4

Netherlands 0.8 5.9 2.9 3.8 4.7 5.2 6.1 5.9 6.2 7.6

Belgium 0.5 5.5 5.1 5.2 4.2 4.1 5.0 4.5 3.5 2.3

Austria 0.5 -1.7 -0.8 -1.0 -1.0 -0.3 2.6 1.5 2.7 2.9

Greece 0.4 -2.1 -3.5 -5.7 -8.8 -9.2 -9.7 -10.1 -9.5 -9.2

Portugal 0.3 -3.5 -5.0 -6.5 -9.0 -8.9 -6.4 -4.0 -5.7 -8.1

Finland 0.3 5.4 5.6 6.1 7.2 6.9 7.3 3.8 4.1 2.4

Ireland 0.3 3.1 0.9 0.3 -0.4 -0.6 -1.0 0.0 -0.8 -1.0

Luxembourg 0.1 10.4 9.2 8.4 13.2 8.8 11.0 6.4 10.5 8.4

Emerging market and developing economies 47.7 -1.3 -1.9 -0.2 1.4 0.7 1.3 2.0 2.5 4.1


China 15.4 3.6 3.1 1.4 1.7 1.3 2.4 2.8 3.6 7.1

Latin America(d)

7.4 -3.3 -4.5 -3.2 -2.4 -2.8 -0.9 0.4 0.9 1.2

Brazil 2.6 -3.8 -4.2 -4.7 -4.0 -4.5 -1.7 0.8 1.9 1.8

Community of Independent States 3.8 -1.2 -1.9 8.2 13.6 8.0 6.5 6.3 8.1 9.1

Central and Eastern Europe 3.3 -3.7 -3.1 -4.4 -5.3 -2.7 -3.5 -4.3 -5.7 -5.2

Africa 3.3 -1.4 -4.5 -3.5 1.6 0.1 -1.6 -0.4 0.1 1.9

Middle East 2.8 1.9 -5.0 2.3 11.1 6.2 4.6 8.1 12.4 19.1

Memo:

European Union (EU25) 20.3 - - - - -0.8 0.0 -0.1 -0.2 -0.8

Sources: European Commission, IMF and Banco de Portugal

Notes: (a) Based on GDP valued at purchasing power parities. (b) Details about country aggregates and aggregation methodology can be obtained in www. imf.org. (c) Current account + capital account. (d) Corresponds to the aggregate “Western Hemisphere” defined by the IMF.

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Table A.1.4

ADVANCED ECONOMIES – UNEMPLOYMENT RATE

Per cent

1997 1998 1999 2000 2001 2002 2003 2004 2005

Advanced economies(a)

6.8 6.7 6.3 5.8 5.8 6.3 6.6 6.3 6.0

United States 4.9 4.5 4.2 4.0 4.7 5.8 6.0 5.5 5.1

Japan 2.3 3.1 2.6 2.6 2.1 2.9 3.2 3.8 3.6

United Kingdom 7.1 6.3 6.0 5.5 5.1 5.2 5.0 4.8 4.8

Newly industrialised Asian economies 2.5 5.4 5.4 4.0 4.2 4.2 4.4 4.2 4.0

Euro area 10.6 10.1 9.2 8.2 7.9 8.3 8.7 8.9 8.6

Germany 9.1 8.8 7.9 7.2 7.4 8.2 9.0 9.5 9.5

France 11.5 11.1 10.5 9.1 8.4 8.9 9.5 9.6 9.5

Italy 11.3 11.3 10.9 10.1 9.1 8.6 8.4 8.0 7.7

Spain 16.7 15.0 12.5 11.1 10.3 11.1 11.1 10.6 9.2

Netherlands 4.9 3.8 3.2 2.8 2.2 2.8 3.7 4.6 4.7

Belgium 9.2 9.3 8.5 6.9 6.6 7.5 8.2 8.4 8.4

Austria 4.4 4.5 3.9 3.6 3.6 4.2 4.3 4.8 5.2

Greece 9.8 10.9 12.0 11.3 10.8 10.3 9.7 10.5 9.8

Portugal - 5.0 4.4 3.9 4.0 5.0 6.3 6.7 7.6

Finland 12.7 11.4 10.2 9.8 9.1 9.1 9.0 8.8 8.4

Ireland 9.9 7.5 5.7 4.3 4.0 4.5 4.7 4.5 4.3

Luxembourg 2.7 2.7 2.4 2.3 2.1 2.8 3.7 4.8 5.3

Memo:

European Union (EU25) 10.1 9.4 9.1 8.6 8.4 8.8 9.0 9.1 8.7

Sources: European Commission, IMF, INE and Banco de Portugal.

Note: (a) Details about country aggregates and aggregation methodology can be obtained in www. imf.org.

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Table A.1.5

ADVANCED ECONOMIES – PUBLIC FINANCE INDICATORS


1997 1998 1999 2000 2001 2002 2003 2004 2005

Fiscal balance


-1.9 -1.5 -1.1 -0.2 -1.6 -3.5 -4.1 -3.6 -3.1

United States -1.1 0.1 0.6 1.3 -0.7 -4.0 -5.0 -4.7 -4.1

Japan -4.1 -5.6 -7.5 -7.7 -6.4 -8.2 -8.1 -6.6 -5.8

United Kingdom -2.2 0.0 1.1 3.7 0.7 -1.6 -3.3 -3.3 -3.5

Newly industrialised Asian economies 0.3 -2.1 -3.0 -2.1 -4.7 -3.4 -1.9 -1.2 -0.8

Euro area -2.6 -2.2 -1.3 0.1 -1.8 -2.5 -3.0 -2.8 -2.4

Germany -2.6 -2.2 -1.5 1.3 -2.8 -3.7 -4.0 -3.7 -3.3

France -3.0 -2.6 -1.7 -1.5 -1.6 -3.2 -4.2 -3.7 -2.9

Italy -2.6 -2.8 -1.7 -0.7 -3.1 -2.9 -3.4 -3.4 -4.1

Spain -3.1 -3.0 -1.1 -0.9 -0.5 -0.3 0.0 -0.1 1.1

Netherlands -1.1 -0.7 0.6 2.1 -0.2 -2.0 -3.1 -1.9 -0.3

Belgium -2.0 -0.8 -0.5 0.1 0.6 0.0 0.1 0.0 0.1

Austria -1.7 -2.3 -2.2 -1.5 0.0 -0.5 -1.5 -1.1 -1.5

Greece -6.6 -4.3 -3.4 -4.0 -4.9 -4.9 -5.8 -6.9 -4.5

Portugal(b)

- - -2.7 -2.9 -4.3 -2.9 -2.9 -3.2 -6.0

Finland -1.2 1.7 1.7 7.0 5.1 4.1 2.5 2.3 2.6

Ireland 1.1 2.4 2.5 4.4 0.8 -0.4 0.2 1.5 1.0

Luxembourg 3.5 3.2 3.3 5.9 5.9 2.0 0.2 -1.1 -1.9

Memo:

European Union (EU25) - - -0.8 0.8 -1.3 -2.3 -3.0 -2.6 -2.3

Public debt


- - - - - - - - -

United States 69.9 66.2 62.8 57.1 56.6 58.9 61.8 62.5 62.9

Japan 107.7 120.5 134.3 142.2 151.6 161.2 167.1 172.1 175.5

United Kingdom 49.8 46.6 44.2 41.2 38.1 37.6 39.0 40.8 42.8

Newly industrialised Asian economies - - - - - - - - -

Euro area 73.5 73.0 71.7 69.2 68.3 68.1 69.3 69.8 70.8

Germany 59.6 59.8 60.2 59.2 58.7 60.3 63.8 65.5 67.7

France 58.5 58.7 58.3 56.7 56.2 58.2 62.4 64.4 66.8

Italy 118.0 114.9 113.7 109.2 108.7 105.5 104.2 103.8 106.4

Spain 65.3 63.2 61.6 59.2 55.6 52.6 48.9 46.4 43.2

Netherlands 67.0 64.0 60.5 53.6 50.7 50.5 51.9 52.6 52.9

Belgium 122.2 117.0 113.6 107.7 106.3 103.2 98.5 94.7 93.3

Austria 63.8 64.2 66.5 65.8 66.1 66.0 64.4 63.5 62.9

Greece 114.1 112.4 112.3 111.6 113.2 110.7 107.8 108.5 107.5

Portugal(b)

- - 51.4 50.5 52.9 55.5 56.9 58.6 64.0

Finland 53.6 48.2 46.6 44.3 43.3 41.3 44.4 44.3 41.1

Ireland 63.6 53.0 48.1 37.8 35.3 32.1 31.1 29.4 27.6

Luxembourg 6.4 6.2 5.6 5.3 6.5 6.5 6.3 6.6 6.2

Memo:

European Union (EU25) - 66.4 65.8 61.9 61.1 60.5 62.0 62.4 63.4

Sources: European Commission, IMF and Banco de Portugal calculations.

Notes: (a) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. (b) The accounts for 1997-1998 are not shown, because they have not yet been compiled by the National Statistical Institute in the new national accounts base (2000 base). For the values for this period in the 1995 base of

the national accounts, see the 2004 Annual Report.

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Table A.2.1

INTEREST RATES OF THE EUROPEAN CENTRAL BANK

Per cent

Date of the decision Main refinancing operations Marginal lending facility Deposit facility Magnitude of the change in the rate

of the main refinancing operations

(b.p.)

1998 22 December 3.00 4.50(a)

2.00(a)

-

1999 8 April 2.50 3.50 1.50 -50

4 November 3.00 4.00 2.00 50

2000 3 February 3.25 4.25 2.25 25

16 March 3.50 4.50 2.50 25

27 April 3.75 4.75 2.75 25

8 June(b)

4.25 5.25 3.25 50

31 August 4.50 5.50 3.50 25

5 October 4.75 5.75 3.75 25

2001 10 May 4.50 5.50 3.50 -25

30 August 4.25 5.25 3.25 -25

17 September 3.75 4.75 2.75 -50

8 November 3.25 4.25 2.25 -50

2002 5 December 2.75 3.75 1.75 -50

2003 6 March 2.50 3.50 1.50 -25

5 June 2.00 3.00 1.00 -50

2005 1 December 2.25 3.25 1.25 25

2006 2 March 2.50 3.50 1.50 25

8 June 2.75 3.75 1.75 25

Source: ECB.

Notes: (a) Except in the period from 4 to 21 January 1999. During this period a narrow corridor of 50 basis points was applied between the interest rates on the marginal lending and the deposit facility (which stood at 3.25 and 2.75 per cent, respectively), aimed at facilitating the transition to the new monetary regime by market par-

ticipants. (b) From this date onwards, the interest rate on the main refinancing operations is the minimum bid rate in variable rate tenders.

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Table A.2.2

MONETARY AND FINANCIAL CONDITIONS OF THE PORTUGUESE ECONOMY

Average values

Per cent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Interest rates

3-month Euribor(a)

7.3 5.6 4.2 3.0 4.4 4.3 3.3 2.3 2.1 2.2

Yields on fixed-rate Treasury bonds - 10 years 8.6 6.4 4.8 4.8 5.6 5.2 5.0 4.2 4.1 3.4

Interest rate on outstanding amounts of loans to non-financial corporations 12.9 10.2 8.2 5.8 6.0 6.4 5.4 4.6 4.4 4.3

Interest rate on outstanding amounts of loans to households for house purchase 12.5 10.8 7.6 5.5 5.9 6.7 5.4 4.3 3.8 3.7

Interest rate on outstanding amounts of loans to households for consumption and

other purposes

17.0 14.2 11.4 9.2 9.0 9.5 8.3 7.9 7.8 7.7

Stock market

PSI Geral index (percentage change from the previous comparable period) 15.6 56.9 58.4 -8.5 21.1 -23.0 -18.3 -6.7 27.5 11.3

Exchange rate

Nominal effective exchange rate index (percentage change)(b)

-0.5 -1.9 -1.2 -1.2 -2.3 0.3 0.6 2.6 0.7 -0.2

EUR/USD exchange rate 1.07 0.92 0.90 0.94 1.13 1.24 1.24

Loans granted by resident financial institutions to the non-financial private sector

(annual growth rate)(c)

28.0 23.2 14.1 9.7 7.7 6.7 7.8

Households 29.9 20.2 12.7 11.7 10.1 9.8 10.1

For house purchase 30.0 20.3 15.6 15.7 11.8 10.9 11.5

Other lending 29.5 20.0 6.1 1.5 5.3 6.0 5.4

Non-financial corporations 26.7 26.5 15.5 8.0 5.0 3.2 4.8

Memo:

CPI average rate of change 3.1 2.2 2.8 2.3 2.9 4.4 3.6 3.3 2.4 2.3


Notes: (a) Up to December 1998, 3-month Lisbor. (b) A positive change corresponds to an appreciation of the index. Up to 1999, the index includes a group of 13 trading partners; from 1999 onwards, the index includes a group of 22 trading partners. For details on the methodology see A. C. Gouveia and C. Coimbra (2004), “New

effective exchange rate index for the Portuguese economy”, Economic Bulletin, December, Banco de Portugal. (c) Loans granted by resident financial institutions adjusted for securitisations conducted through non-resident special purpose vehicles. The resident financial institutions aggregate includes other resident monetary fi-

nancial institutions and other credit institutions in the other resident financial intermediaries and financial auxiliaries sector.

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Table A.2.3

LOANS GRANTED BY OTHER MONETARY FINANCIAL INSTITUTIONS TO NON-FINANCIAL CORPORATIONS(a)

Breakdown by sector

Annual rate of change at end-period

1998 1999 2000 2001 2002 2003 2004 2005 Weight in total

loans

Total loans to non-financial corporations -18.0 24.1 26.9 14.7 7.7 1.8 1.5 4.6 100.0

Agriculture, livestock, hunting, forestry and fishing -10.0 24.2 5.7 1.0 21.3 7.0 2.4 4.7 1.5

Mining and quarrying 3.6 33.6 2.9 10.2 -7.3 14.4 -8.0 0.9 0.5

Manufacturing -9.8 16.9 16.3 7.4 3.1 -1.3 -5.7 -4.6 15.1

Generation and distribution of electricity, gas and water -10.0 3.5 38.0 -19.0 -1.7 4.5 -2.3 33.4 1.9

Construction -26.5 27.8 44.8 17.9 5.7 3.1 4.9 8.6 19.3

Services -19.6 26.6 25.8 18.2 9.8 2.0 2.5 4.7 61.8

of which:

Real estate activities -22.5 36.8 36.9 43.5 16.3 11.2 13.6 10.7 15.9

Other services provided mainly to corporations -24.3 39.2 48.5 40.4 5.7 -6.4 -2.0 6.6 13.4


Note: (a) Annual rates of change are obtained from the ratio of the outstanding amounts of bank loans at end-period to transactions, which are calculated from outstanding amounts adjusted for reclassifications.

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Table A.2.4

COMPETITIVENESS AND STRUCTURAL INDICATORS


In percentage

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Price/cost competitiveness

Portugal

Nominal effective exchange rate index(a)

2.0 -0.5 -1.9 -1.2 -1.2 -2.3 0.3 0.6 2.6 0.7 -0.2

Real effective exchange rate index (based on relative CPIs)(a)

3.4 0.4 -1.6 0.1 -0.1 -1.9 2.2 2.0 3.7 1.0 -0.4

Compensation per employee(b)

- 6.1 5.9 5.1 5.3 5.6 4.3 3.0 2.2 (1.8) 2.3 (2.8) 3.0

Productivity per employee(c)

- 2.0 2.6 2.0 2.0 1.5 0.5 0.3 -0.8 1.0 0.3

Nominal unit labour costs - 4.0 3.2 3.1 3.3 4.0 3.8 2.8 3.0 (2.6) 1.3 (1.8) 2.7

Euro area

Compensation per employee - 2.4 2.0 1.0 2.1 2.5 2.6 2.6 2.2 2.2 1.7

Productivity per employee - 0.9 1.7 0.6 0.9 1.6 0.5 0.3 0.4 1.2 0.6

Nominal unit labour costs - 1.5 0.3 0.4 1.2 0.9 2.1 2.3 1.8 1.0 1.1

European Union (EU25)

Compensation per employee - - - - - - 3.9 3.2 3.1 2.9 2.4

Productivity per employee - - - - - - 0.9 0.8 0.9 1.8 0.8

Nominal unit labour costs - - - - - - 3.0 2.4 2.2 1.1 1.6

Structural indicators

Portugal

GDP per capita in PPS as a percentage of the EU15 average 68.6 68.8 70.1 71.5 73.5 73.4 73.1 72.8 70.8 69.9 69.2

Labour force as a percentage of total population(d)

48.1 48.7 49.1 49.5 49.9 50.2 50.7 51.1 51.3 51.2 51.5

Employment as a percentage of the labour force(d)

92.9 92.9 93.4 94.8 95.4 95.9 95.9 94.9 93.6 93.2 92.3

Labour productivity (1000 PPS) 26.3 27.3 28.8 30.1 31.9 33.6 34.2 35.2 34.9 36.0 36.8

Labour productivity as a percentage of the EU15 average 63.9 63.5 64.3 65.2 67.1 67.4 67.0 67.0 65.8 65.5 65.4

Percentage of the population aged 20-24 having completed at least the

secondary education(e)

45.1 46.2 47.1 39.3 40.1 42.8 43.5 44.2 47.7 49.0 48.4

Gross domestic expenditure on R&D as a percentage of GDP 0.6 - 0.6 - 0.7 - 0.9 0.8 0.8 - -

Percentage of gross domestic expenditure on R&D financed by government 65.3 66.9 68.2 69.1 69.7 64.8 61.0 60.5 60.1 - -

European Union (EU15)

Percentage of the population aged 20-24 having completed at least the

secondary education

69.2 68.1 69.6 - 72.4 73.5 73.3 73.7 73.6 73.7 74.5

Gross domestic expenditure on R&D as a percentage of GDP 1.9 1.9 1.9 1.9 1.9 1.9 2.0 2.0 2.0 2.0 -

Percentage of gross domestic expenditure on R&D financed by government - 36.8 35.9 35.5 34.1 33.8 33.7 33.7 34.7 - -

Sources: ECB, European Commission, INE, OECD and Banco de Portugal.

Notes: (a) A positive change corresponds to an appreciation of the index. Up to 1999, the index includes a group of 13 trading partners; from 1999 onwards, the index includes a group of 22 trading partners. For details on the methodology see Gouveia, A. C. and Coimbra, C. (2004), “New effective exchange rate index for the Por-

tuguese economy”, Economic Bulletin, December, Banco de Portugal. (b) Average compensation per employee, gross of contributions and income taxes, excluding state transfers to Caixa Geral de Aposentações; In brackets, figures adjusted for the direct effect of the sale of tax credits by general government in 2003. (c)

1995-2003 National Accounts, 2004-2005 Labour Force Survey. (d) Employment and population – Source: European Commission. (e) Series break in 1998.

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Table A.3.1

GROSS VALUE ADDED BY SECTOR OF ACTIVITY(a)

Real growth rates

Per cent

Weights in

2003(b)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Agriculture, forestry and fisheries 3.4 5.2 -8.5 -3.9 5.0 -4.7 -3.2 2.4 -3.1 -0.1 -7.4

Manufacturing 16.2 8.5 6.4 2.6 -0.3 2.1 1.5 -0.6 -0.7 0.4 -1.6

of which:

Food products, beverages and tobacco 2.4 0.4 2.4 1.4 0.5 1.2 0.2 -0.3 0.0 1.7 0.4

Textiles, wearing apparel, leather and footwear 3.3 1.1 0.9 -0.4 -4.5 -0.9 1.3 -3.9 -5.6 -5.3 -8.1

Wood, cork and paper 2.0 4.7 5.1 1.4 -2.3 2.8 0.4 -3.1 -1.0 4.3 -0.8

Chemicals and refined petroleum products 0.8 1.8 11.0 -2.7 -2.3 -0.8 -5.2 12.2 0.5 1.3 -0.2

Metal products, machinery and transport equipment 4.6 30.0 11.1 5.6 3.1 5.4 2.3 2.5 1.5 0.4 2.6

Electricity, gas and water supply 2.5 6.3 1.8 8.8 3.3 9.5 3.6 0.3 6.5 5.7 5.4

Construction 6.7 1.6 8.4 6.1 1.8 6.3 2.8 -4.0 -12.7 -1.9 -5.2

Services 71.2 2.0 4.1 4.4 4.4 4.4 2.9 1.5 0.4 1.9 1.5

Trade and repair 13.2 2.3 6.8 4.9 2.2 3.7 0.6 -0.4 -2.8 2.6 0.9

Hotels and restaurants 4.2 -4.1 5.1 4.4 1.2 6.9 1.4 -3.5 -1.9 1.4 1.6

Transport and communication 7.0 1.2 1.4 4.8 7.4 9.3 8.5 2.7 0.3 5.0 -2.6

Financial intermediation 6.6 3.6 11.3 14.7 14.9 10.9 9.1 7.2 9.9 3.5 11.2

Public administration, education and health 22.6 2.2 0.6 2.9 3.4 2.9 1.9 2.5 1.7 0.6 0.7

Other 17.5 2.5 4.3 1.8 3.0 2.1 1.9 0.4 -1.7 1.3 -3.8

GVA 100.0 3.5 4.1 3.9 3.3 3.9 2.4 0.8 -0.8 1.4 0.4

Memo:

GDP(c)

- 3.6 4.2 4.7 3.9 3.9 2.0 0.8 -1.2 1.1 0.3


Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003. (b) As a percentage of nominal GVA. (c) GDP at market prices. Nominal GDP includes not only sectoral GVA but also VAT and import taxes.

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Table A.3.2

GROSS DOMESTIC PRODUCT – EXPENDITURE SIDE(a)

Current prices

EUR millions

Weights 2004

(per cent)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Private consumption 64.4 58 993 62 857 67 703 72 820 78 100 81 797 85 385 87 854 92 085 95 897

Public consumption 20.6 16 419 17 725 19 068 21 257 23 624 25 436 27 144 28 040 29 452 31 123

Investment 22.9 21 387 25 170 29 129 31 743 33 861 35 031 34 160 31 363 32 707 32 886

Gross fixed capital formation 22.3 20 841 24 692 28 244 30 617 33 103 34 218 33 841 30 951 31 848 31 941

Machinery and metal products 5.2 4 934 5 717 6 763 7 288 7 965 8 208 7 651 7 194 7 503 7 710

Transport equipment 1.8 2 029 2 659 3 178 3 496 3 704 3 339 2 888 2 535 2 531 2 515

Construction 11.7 11 251 13 322 14 691 15 525 16 913 18 056 18 134 16 349 16 757 16 558

Other 3.5 2 627 2 993 3 613 4 307 4 521 4 616 5 167 4 873 5 057 5 158

Change in inventories 0.6 546 478 885 1 126 758 813 319 412 859 944

Domestic demand 107.8 96 800 105 751 115 900 125 820 135 585 142 264 146 689 147 257 154 244 159 906

Exports 28.6 25 506 27 981 30 843 31 873 36 387 37 360 37 879 38 564 40 888 42 000

Goods 20.9 19 483 21 229 22 734 23 346 26 774 27 383 27 608 28 438 29 829 30 766

Tourism and other services 7.7 6 023 6 752 8 109 8 527 9 612 9 978 10 271 10 126 11 059 11 234

Global demand 136.4 122 306 133 733 146 744 157 693 171 971 179 625 184 568 185 821 195 132 201 906

Imports 36.4 31 798 35 834 40 343 43 500 49 701 50 316 49 135 47 886 52 091 54 892

Goods 31.2 26 661 30 205 34 013 37 080 42 400 42 926 41 786 40 920 44 661 47 226

Tourism and other services 5.2 5 137 5 629 6 331 6 420 7 301 7 390 7 349 6 966 7 429 7 665

GDP 100.0 90 508 97 898 106 400 114 193 122 270 129 308 135 434 137 935 143 041 147 014


Note: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003.

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Table A.3.3


Real rate of change

Per cent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Private consumption 3.3 3.6 5.3 5.2 3.7 1.3 1.3 0.0 2.3 1.8

Public consumption 2.7 3.2 3.1 6.0 3.5 3.3 2.6 0.7 1.6 1.9

Investment 4.7 12.6 13.9 7.1 2.1 1.2 -4.7 -9.8 1.1 -3.7

Gross fixed capital formation 5.6 14.3 11.7 6.2 3.5 1.0 -3.5 -10.0 0.0 -2.7

Machinery and metal products 3.5 12.9 17.2 9.6 4.6 4.6 -5.8 -4.4 3.3 1.7

Transport equipment 19.0 27.5 19.7 5.4 3.0 -13.2 -14.7 -11.7 -2.2 -2.7

Construction 4.3 14.0 7.7 3.7 4.1 3.4 -3.4 -11.8 -1.4 -4.6

Other 6.0 8.0 12.2 10.4 -0.3 -2.6 8.2 -10.9 0.8 -2.8

Change in inventories(b)

-0.2 -0.3 0.6 0.3 -0.4 0.1 -0.4 0.0 0.2 -0.2

Domestic demand 3.5 5.5 7.0 5.8 3.3 1.7 0.1 -2.2 1.9 0.6

Contribution of domestic demand to GDP(b)

3.8 5.9 7.5 6.3 3.6 1.8 0.1 -2.4 2.0 0.7

Exports 5.8 6.2 8.5 3.0 8.4 1.8 1.4 3.7 5.3 0.9

Goods 9.6 5.9 6.9 3.1 8.2 1.5 1.8 6.3 4.3 1.0

Tourism and other services -5.2 7.1 13.3 2.8 9.0 2.6 0.5 -3.4 7.9 0.8

Global demand 4.0 5.6 7.3 5.2 4.3 1.7 0.4 -1.0 2.6 0.7

Imports 5.1 9.8 14.2 8.6 5.3 0.9 -0.7 -0.5 7.0 1.7

Goods 6.0 10.7 14.4 9.6 5.1 1.3 -0.3 0.5 6.9 1.6

Tourism and other services 0.8 4.9 12.8 3.5 6.4 -1.6 -2.9 -6.0 7.8 2.5

Contribution of net external demand to GDP(b)

-0.1 -1.7 -2.8 -2.4 0.3 0.2 0.7 1.2 -1.0 -0.4

GDP 3.6 4.2 4.7 3.9 3.9 2.0 0.8 -1.2 1.1 0.3


Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003. (b) Contribution to the GDP growth rate in percentage points.

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Table A.3.4


Rate of change in implicit deflators

Per cent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Private consumption 2.9 2.9 2.3 2.3 3.4 3.4 3.0 2.9 2.4 2.3

Public consumption 5.1 4.6 4.3 5.2 7.3 4.2 4.0 2.6 3.4 3.7

Investment 2.7 4.5 1.6 1.7 4.5 2.2 2.4 1.8 3.2 4.4

Gross fixed capital formation 3.0 3.7 2.4 2.1 4.5 2.4 2.5 1.6 2.9 3.0

Machinery and metal products 5.0 2.7 0.9 -1.7 4.5 -1.5 -1.1 -1.6 1.0 1.0

Transport equipment -1.1 2.8 -0.1 4.4 2.8 3.9 1.4 -0.6 2.1 2.1

Construction 2.9 3.9 2.4 1.9 4.6 3.3 3.9 2.2 4.0 3.6

Other 3.0 5.5 7.6 8.0 5.3 4.8 3.5 5.8 2.9 5.0

Change in inventories - - - - - - - - - -

Domestic demand 3.2 3.6 2.5 2.6 4.4 3.2 3.0 2.6 2.8 3.0

Exports -1.1 3.3 1.6 0.3 5.3 0.8 -0.1 -1.8 0.7 1.8

Goods -2.3 2.9 0.1 -0.4 6.0 0.7 -1.0 -3.1 0.5 2.2

Tourism and other services 3.1 4.7 6.0 2.3 3.4 1.1 2.5 2.1 1.2 0.8

Global demand 2.3 3.5 2.3 2.1 4.6 2.7 2.4 1.7 2.4 2.8

Imports 1.5 2.6 -1.4 -0.7 8.5 0.3 -1.7 -2.1 1.6 3.6

Goods 1.3 2.3 -1.6 -0.5 8.8 -0.1 -2.4 -2.5 2.1 4.1

Tourism and other services 2.8 4.5 -0.3 -2.0 6.8 2.8 2.4 0.8 -1.1 0.7

GDP 2.6 3.8 3.8 3.3 3.0 3.7 3.9 3.0 2.6 2.4


Note: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003.

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Table A.3.5

EXTERNAL DEMAND OF GOODS(a)

, PORTUGUESE EXPORTS AND MARKET SHARE

Real rate of change

Per cent

Weights in

2004

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

External demand for the Portuguese economy(a)

100.0 4.8 10.0 10.9 8.1 11.0 1.2 1.8 4.5 8.5 5.8

Intra-euro area external demand 76.4 3.7 9.6 11.5 8.5 11.3 1.5 1.6 4.5 8.4 6.1

of which imports from:

Spain 27.2 8.2 13.3 14.6 13.2 10.2 3.8 4.4 6.4 10.1 7.1

Germany 16.9 3.2 8.8 11.1 8.4 10.6 0.2 -0.3 6.6 8.2 6.1

France 15.1 0.5 7.9 12.4 8.0 15.9 1.7 2.0 0.8 7.5 7.1

Italy 5.4 -2.9 9.9 8.2 4.2 7.1 -0.9 -0.8 0.5 3.3 -0.1

Belgium 5.2 3.0 4.2 7.0 2.8 8.0 -1.1 0.4 4.0 7.5 3.6

Netherlands 4.3 4.6 9.9 8.3 5.5 10.6 1.6 0.3 3.6 8.9 6.0

Extra-euro area foreign demand 23.6 7.7 11.2 9.3 6.9 10.2 0.3 2.2 4.7 8.7 4.7

of which imports from:

United Kingdom 11.8 9.5 9.8 8.5 6.7 8.8 3.1 1.9 5.5 7.8 2.2

US 6.5 9.3 14.4 11.7 12.4 13.5 -3.2 3.7 4.9 11.0 6.9

Portuguese exports of goods(b)

9.6 5.9 6.9 3.1 8.2 1.5 1.8 6.3 4.3 1.0

Market share 4.6 -3.7 -3.6 -4.7 -2.6 0.3 0.1 1.7 -3.8 -4.5

Sources: European Commission, UK Office for National Statistics, INE and Banco de Portugal.

Notes: (a) Computed as a weighted average of the real growth rates of imports of goods in 17 major trading partners. Each individual country was weighted according to its share in Portuguese exports in the previous year. The 17 countries selected account for around 90 percent of total exports. (b) Excludes the value of exports of

aeronautic material after repair.

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Table A.3.6

PORTUGUESE EXPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a)


Per cent

Weights in 2004 1998 1999 2000 2001 2002 2003 2004 2005(c)

Total 100.0 6.3 3.5 14.6 2.0 1.8 2.5 5.3 2.6

Consumer goods 39.2 3.9 1.9 6.2 4.1 -9.4 -1.4 0.7 -1.2

Food 6.6 4.9 0.6 12.3 1.8 10.1 3.8 5.8 4.8

Non-food(b)

25.2 3.9 2.3 6.4 2.5 -11.5 0.2 -1.8 -2.5

Passenger cars 7.4 3.1 1.3 2.1 11.4 -14.5 -10.8 5.4 1.3

Capital goods 27.5 21.7 5.4 20.3 8.7 34.0 9.3 3.0 -2.6

Transport equipment(b)

13.6 24.1 0.0 28.3 1.0 85.6 7.6 1.8 -9.5

Other capital goods 13.9 20.3 9.0 15.6 13.8 4.1 11.0 4.2 4.1

Fuels 2.5 -27.9 20.3 55.7 -24.3 4.8 31.3 22.4 58.1

Intermediate goods 30.4 5.1 4.4 22.6 -3.4 -2.0 0.5 12.8 4.2

Sources: INE (International Trade Statistics) and Banco de Portugal.

Notes: (a) The classification presented in this table is different from that of INE as passenger cars are considered as consumer goods and not capital goods. (b) Excluding passenger cars. (c) For 2005 the rates of change are calculated on the basis of the new methodology disclosed by INE in September 2005 (exports include esti-

mates of non-response and of exports below the reporting threshold).

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Table A.3.7

PORTUGUESE EXPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a)

Real rate of change

Per cent

Weights in 2004 1998 1999 2000 2001 2002 2003 2004 2005(c)

Total 100.0 6.2 3.9 8.1 1.3 2.8 5.8 4.7 0.5

Consumer goods 39.2 3.1 2.8 2.6 2.1 -7.9 2.5 2.5 -1.0

Food 6.6 3.2 0.3 7.8 -1.1 10.6 8.2 5.5 4.5

Non-food(b)

25.2 3.5 2.6 4.1 1.2 -11.0 5.6 0.0 -4.2

Passenger cars 7.4 2.2 3.8 -3.3 8.5 -11.0 -9.5 8.2 4.6

Capital goods 27.5 19.9 7.8 19.1 6.1 28.3 12.8 3.8 -1.7


13.6 23.5 0.6 21.9 0.2 86.9 10.0 0.9 -10.6

Other capital goods 13.9 18.4 11.5 14.7 10.7 -0.8 14.7 5.3 5.3

Fuels 2.5 -10.4 3.5 1.5 -17.2 9.8 27.7 9.0 22.9

Intermediate goods 30.4 5.3 4.0 12.0 -2.4 -0.3 3.2 9.4 0.7


Notes: (a) The classification presented in this table is different from that of INE as passenger cars are considered as consumer goods and not capital goods. (b) Excluding passenger cars. (c) For 2005 the rates of change are calculated on the basis of the new methodology disclosed by INE in September 2005 (exports include esti-

mates of non-response and of exports below the reporting threshold).

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Table A.3.8

PORTUGUESE IMPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a)


Per cent

Weights in 2004 1998 1999 2000 2001 2002 2003 2004 2005(c)

Total 100.0 12.6 8.7 15.3 1.9 -3.7 -1.7 9.8 5.5

Consumer goods 30.8 22.4 14.7 5.6 3.2 0.6 -2.5 8.9 1.4

Food 8.5 19.8 11.5 4.6 11.0 -0.5 1.4 5.3 1.8

Non-food(b)

16.2 16.7 11.8 9.3 4.7 3.5 0.1 8.4 1.2

Passenger cars 6.1 39.6 24.3 -0.1 -7.9 -4.6 -13.9 15.8 2.6

Capital goods 28.3 18.1 7.9 12.3 1.7 -7.7 -0.4 10.4 -0.9


9.9 11.1 10.5 12.5 -1.9 -10.7 3.6 11.5 -11.2

Other capital goods 18.4 22.3 6.5 12.2 3.7 -6.2 -2.4 9.9 4.5

Fuels 10.8 -23.3 39.5 74.5 -3.7 -5.1 3.4 19.5 40.8

Intermediate goods 30.1 8.0 -0.5 15.6 2.7 -3.5 -3.6 7.3 1.1


Notes: (a) The classification presented in this table is different from that of INE as passenger cars are considered as consumer goods and not capital goods. (b) Excluding passenger cars. (c) For 2005 the rates of change are calculated on the basis of the new methodology disclosed by INE in September 2005 (imports include esti-

mates of non-response and of imports below the reporting threshold).

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Table A.3.9

PORTUGUESE IMPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a)

Real rate of change

Per cent

Weights in 2004 1998 1999 2000 2001 2002 2003 2004 2005(c)

Total 100.0 14.5 9.3 6.0 2.0 -1.4 0.9 7.6 1.3

Consumer goods 30.8 19.6 14.1 2.2 -0.4 2.3 0.8 10.8 3.1

Food 8.5 15.5 10.8 0.3 7.3 1.4 5.9 4.2 1.4

Non-food(b)

16.2 14.2 12.6 4.6 1.9 5.6 3.8 12.8 4.3

Passenger cars 6.1 39.1 20.0 0.5 -13.6 -7.2 -14.4 15.4 3.1

Capital goods 28.3 17.4 7.9 8.0 2.1 -6.4 3.3 10.7 0.2


9.9 9.5 9.9 8.7 -4.9 -11.3 3.5 11.4 -10.9

Other capital goods 18.4 21.9 6.8 7.6 6.0 -4.1 3.0 10.4 5.9

Fuels 10.8 6.3 10.0 -1.0 3.6 2.1 -1.9 3.9 7.0

Intermediate goods 30.1 8.8 3.8 10.1 3.4 -1.1 -0.7 4.8 -0.8


Notes: (a) The classification presented in this table is different from that of INE as passenger cars are considered as consumer goods and not capital goods. (b) Excluding passenger cars. (c) For 2005 the rates of change are calculated on the basis of the new methodology disclosed by INE in September 2005 (imports include esti-

mates of non-response and of imports below the reporting threshold).

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Table A.3.10

EXPORTS OF GOODS BY ECONOMIC ZONES AND COUNTRIES OF DESTINATION

Per cent

Structure of exports – weights Nominal rate of change

1996 2004 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(a)

Intra - EU25 81.2 80.6 8.3 11.0 8.0 5.1 10.9 1.6 1.9 2.1 4.8 1.5

Intra - EU15 80.6 79.2 8.1 10.8 7.9 5.0 10.5 1.5 1.8 2.0 4.9 1.0

France 14.4 13.8 10.1 8.8 6.6 1.8 4.1 2.4 8.3 -0.1 10.3 1.2

Netherlands 4.9 4.0 0.9 11.8 2.5 -4.7 10.0 -2.0 -3.8 0.4 13.0 2.1

Germany 21.1 13.3 6.1 4.0 9.0 0.6 4.7 7.4 -5.3 -14.3 -4.8 -6.3

Italy 3.7 4.3 19.0 15.7 10.3 6.5 9.0 14.2 4.5 6.9 -4.0 3.9

United Kingdom 10.8 9.4 5.5 24.2 5.2 3.6 3.4 -4.2 3.5 1.5 -2.9 -6.2

Ireland 0.5 0.6 27.7 3.7 12.8 20.4 9.1 -1.5 8.7 0.5 16.0 1.4

Denmark 1.8 0.8 -9.7 9.7 -11.2 -1.1 -4.0 -9.3 -5.7 -9.2 -4.7 5.2

Greece 0.5 0.4 31.0 -7.4 6.4 30.1 -12.2 -3.2 -0.9 21.4 3.9 6.8

Spain 14.6 25.8 4.1 10.4 15.7 17.8 22.2 2.2 10.6 16.5 12.8 7.1

Sweden 2.1 1.1 4.0 12.7 -3.5 -2.8 4.9 -6.9 -0.1 -8.0 -10.4 7.6

Finland 0.8 0.7 -1.8 8.3 -10.0 -5.9 -2.4 -3.2 -7.3 5.3 56.7 24.0

Austria 1.2 0.6 28.5 5.2 -9.7 9.1 -7.6 -15.2 -7.8 -0.1 -10.4 -1.5

Belgium/Luxembourg 4.1 4.3 46.3 18.5 14.2 5.3 42.5 -8.4 -17.1 5.2 0.4 -7.7

Intra - euro area 65.9 67.9 9.3 8.6 9.3 5.6 12.2 2.8 1.8 2.4 6.5 1.9

Extra - euro area 34.1 32.1 6.7 14.2 0.8 -0.8 19.5 0.5 2.0 2.8 2.7 4.2

Extra - EU25 18.8 19.4 9.0 8.5 -1.1 -4.4 33.9 4.1 1.5 4.5 7.4 7.2

Extra - UE15 19.4 20.8 9.6 9.3 -0.3 -3.5 34.7 4.3 1.8 4.8 6.7 8.7

EFTA 2.6 1.3 -4.1 -9.3 -0.3 -6.1 45.6 -3.3 -13.2 3.1 -29.4 -6.5

US 4.4 5.8 5.7 17.3 9.5 6.4 33.8 0.9 2.1 1.9 9.2 -5.7

Canada 0.5 0.6 -5.8 49.0 -15.5 -9.1 42.0 1.6 -5.0 19.0 6.8 -22.3

Japan 0.7 0.3 3.9 -4.4 -13.4 -12.5 19.4 -8.9 -13.3 -0.2 -4.0 -8.6

PALOP 2.5 3.0 13.0 22.7 -0.7 -10.8 26.9 13.5 10.3 7.6 2.6 16.5

Brazil 1.0 0.5 33.5 6.6 -1.5 -32.1 44.4 14.1 -27.0 -21.4 19.7 14.7

OPEC 0.6 0.8 -1.5 3.5 0.6 -1.2 37.7 34.4 -6.1 1.6 16.2 36.0

Other 7.1 8.4 17.4 6.0 -4.2 -2.1 34.3 3.8 8.8 8.1 14.2 18.0

Total 100.0 100.0 8.4 10.5 6.3 3.5 14.6 2.0 1.8 2.5 5.3 2.6

Source: INE (International Trade Statistics).

Note: (a) For 2005 the rates of change are calculated on the basis of the new methodology disclosed by INE in September 2005 (exports include estimates of non-response and of exports below the reporting threshold).

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Table A.3.11

IMPORTS OF GOODS BY ECONOMIC ZONES AND COUNTRIES OF ORIGIN

Per cent

Structure of imports – weights Nominal rate of change

1996 2004 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(a)

Intra - EU25 76.7 78.2 10.3 13.1 15.6 8.8 11.8 2.3 0.2 -2.2 8.0 3.1

Intra - EU15 76.3 76.5 10.5 13.1 15.3 8.7 10.9 1.9 -0.2 -2.0 7.7 3.2

France 11.2 9.3 2.2 8.9 17.8 10.3 7.2 -1.9 -3.4 -6.0 4.7 -0.7

Netherlands 4.5 4.6 6.8 20.1 16.5 6.1 10.8 7.0 -8.7 0.9 8.1 1.4

Germany 15.5 14.1 7.9 8.5 15.3 5.2 7.6 2.3 4.6 -3.9 6.5 3.4

Italy 8.4 6.1 8.9 8.6 9.8 6.5 6.2 -2.2 -5.3 -6.4 3.2 -4.6

United Kingdom 6.7 4.6 9.9 22.6 5.4 8.6 1.5 -14.3 -0.6 -7.5 3.3 0.2

Ireland 0.6 0.8 5.4 34.0 13.9 11.9 2.9 0.7 8.1 7.5 22.1 23.9

Denmark 0.8 0.7 7.5 -9.3 10.1 3.2 29.2 -14.8 7.1 -15.5 34.8 11.5

Greece 0.2 0.2 20.5 -25.0 34.5 5.0 63.1 18.1 -5.7 -11.3 -6.7 4.7

Spain 22.7 30.6 15.7 17.4 16.6 12.5 18.3 7.7 1.5 2.3 9.6 6.0

Sweden 1.2 1.3 4.4 9.7 46.5 0.1 6.3 -9.2 0.7 -0.8 19.4 -5.3

Finland 0.5 0.5 -0.9 25.9 35.2 7.0 -11.0 1.1 3.7 -1.2 -1.2 21.7

Austria 0.6 0.8 15.9 3.7 8.0 15.0 24.3 14.3 67.1 7.2 12.5 -12.5

Belgium/Luxembourg 3.3 3.1 8.1 8.3 20.1 4.7 12.9 3.4 -2.5 -5.1 8.7 6.6

Intra - euro area 67.6 70.0 10.7 12.5 15.9 9.0 11.8 3.7 -0.2 -1.4 7.6 3.5

Extra - euro area 32.4 30.0 2.6 14.4 5.9 8.2 23.4 -1.8 -11.3 -2.3 15.3 10.1

Extra - EU25 23.3 21.8 0.8 13.3 2.7 8.4 28.6 0.7 -16.4 0.3 16.6 13.9

Extra - UE15 23.7 23.5 0.5 13.1 3.9 8.8 31.2 2.0 -14.5 -0.7 17.2 12.8

EFTA 2.3 1.9 -12.3 4.7 21.0 24.8 25.0 10.4 -31.8 2.3 -7.5 -0.9

US 3.1 2.3 3.4 13.6 -2.1 12.1 20.8 25.2 -44.8 -10.6 34.0 -0.3

Canada 0.3 0.2 18.9 5.0 22.4 -23.1 31.4 -14.3 -18.4 127.1 -41.9 -6.0

Japan 2.2 1.4 5.5 25.4 28.7 7.2 4.8 -23.2 -11.4 -7.1 -2.8 -10.7

PALOP 0.2 0.1 5.5 73.2 -20.5 1.9 93.1 47.6 -34.0 -56.8 -23.1 63.8

Brazil 1.3 1.8 -5.6 42.1 -9.5 -21.1 30.3 16.3 17.9 0.5 29.8 14.2

OPEC 4.4 4.7 -5.7 11.2 -32.6 20.5 94.5 -8.8 -14.1 8.1 24.0 50.5

Other 9.9 11.0 5.4 8.4 15.0 6.8 23.3 1.6 -2.1 -2.6 21.0 4.4

Source: INE (International Trade Statistics).

Note: (a) For 2005 the rates of change are calculated on the basis of the new methodology disclosed by INE in September 2005 (imports include estimates of non-response and of imports below the reporting threshold).

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Table A.3.12

PORTUGUESE EXPORTS OF GOODS BY GROUPS OF PRODUCTS


Per cent

Weights in 2004 1998 1999 2000 2001 2002 2003 2004 2005(a)

Total 100.0 6.3 3.5 14.6 2.0 1.8 2.5 5.3 2.6

Agriculture 3.5 -5.1 -2.6 23.0 8.2 7.8 -1.4 15.3 9.3

Food products 4.1 8.5 2.9 5.7 1.2 11.0 4.8 1.6 4.4

Mineral fuels 2.9 -26.8 19.8 59.4 -25.0 6.5 27.3 24.9 52.4

Chemicals 4.7 2.5 8.8 28.8 -1.4 8.1 8.0 12.1 17.2

Plastic, rubber products 4.8 15.2 6.8 26.9 3.0 12.4 14.6 16.7 11.3

Leather, leather products 0.3 -1.8 -7.0 21.4 18.7 -2.0 -20.1 -5.4 1.3

Wood, cork 4.6 9.2 0.8 16.9 -0.8 1.9 0.5 3.2 -1.1

Pulp, paper 4.5 -0.5 5.9 33.2 -6.8 -0.1 4.9 -2.7 4.4

Textile products 5.3 6.3 2.6 9.9 7.2 -0.9 -19.3 -3.3 -1.0

Clothing 9.5 3.0 -2.9 -0.4 0.4 -4.2 1.1 -5.4 -9.8

Footwear 4.6 -3.4 1.7 1.0 5.7 -6.2 -9.7 -6.2 -4.8

Minerals, ores 4.7 -1.6 -0.7 7.6 2.3 1.3 4.0 19.5 6.3

Basic metals 6.9 23.7 9.8 26.5 -1.4 8.3 6.1 27.7 10.5

Machinery, equipment 19.0 18.0 11.5 20.1 -0.8 3.5 2.6 1.5 1.2

Motor vehicles, other transport equipment 15.4 8.7 0.2 10.1 8.6 -2.9 4.9 5.8 -6.0

Optical and precision instruments 1.0 2.8 -16.3 6.6 21.4 13.6 12.9 -5.5 -12.3

Other products 4.2 4.3 4.5 18.8 17.4 7.9 22.0 10.4 2.4



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Table A.3.13

PORTUGUESE IMPORTS OF GOODS BY GROUPS OF PRODUCTS


Per cent

Weights in 2004 1998 1999 2000 2001 2002 2003 2004 2005(a)

Total 100.0 12.6 8.7 15.3 1.9 -3.7 -1.7 9.8 5.5

Agriculture 8.5 13.3 1.8 4.9 14.5 -2.5 -0.4 5.8 3.1

Food products 3.8 15.6 14.8 2.8 1.5 3.0 0.4 4.9 -2.7

Mineral fuels 11.0 -23.7 39.1 74.9 -3.1 -5.0 3.3 19.2 43.4

Chemicals 9.1 8.7 10.0 10.2 9.9 6.9 1.9 7.4 3.3

Plastic, rubber products 4.8 7.8 4.8 16.2 2.1 4.6 -1.0 8.5 4.7

Leather, leather products 1.1 5.0 -7.0 9.1 22.3 -10.2 -11.9 -4.0 -4.6

Wood, cork 1.3 30.3 -1.3 20.6 -6.4 -2.8 -7.7 1.5 3.6

Pulp, paper 2.6 11.3 5.8 17.5 5.8 -2.1 -1.1 1.7 0.8

Textile products 3.9 9.8 -8.7 8.6 -3.3 -8.4 -7.7 -5.0 -9.4

Clothing 2.6 16.9 5.5 7.9 7.5 7.7 0.6 5.7 3.1

Footwear 0.9 7.2 11.4 10.2 6.9 1.1 -3.3 2.4 2.5

Minerals, ores 1.7 16.0 7.9 11.5 7.1 -2.3 -3.5 1.3 12.5

Basic metals 8.6 14.1 6.4 19.1 0.7 1.0 -2.4 23.9 2.8

Machinery, equipment 20.9 18.7 5.8 12.2 3.7 -7.8 -1.1 8.5 0.8

Motor vehicles, other transport equipment 14.0 25.0 18.1 7.5 -6.1 -11.6 -5.2 16.8 -4.3

Optical and precision instruments 2.2 20.1 7.6 12.7 -1.4 -0.4 -4.3 1.8 5.0

Other products 3.2 7.3 8.9 21.1 -2.4 1.5 -3.1 7.1 5.6



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Table A.3.14

PORTUGUESE EXPORTS OF GOODS BY GROUPS OF PRODUCTS(a)

Real rate of change

Per cent

NACE - Statistical classification of economic activities Weights in 2003 1998 1999 2000 2001 2002 2003 2004

Total 100.0 6.1 3.8 8.0 1.5 2.1 7.4 4.7

Agriculture, hunting, forestry, fishing, and manufacture of food products, beverages and tobacco 8.2 0.9 1.2 10.2 4.1 10.2 4.7 7.2

Mining and quarrying 0.5 -12.6 -12.6 -19.1 3.0 -3.3 -5.3 40.2

Textiles, textile products, leather and leather products 21.6 1.3 -1.4 1.4 1.5 -6.0 -5.8 -4.1

of which:

Textiles 8.0 5.0 -0.8 5.8 7.3 -2.8 -11.0 -5.4

Wearing apparel; dressing and dyeing of fur 8.4 1.9 -4.5 0.4 -2.3 -8.6 2.3 -1.0

Leather and leather products 5.3 -4.3 2.6 -3.4 -1.6 -7.1 -9.3 -7.0

Wood, wood products, pulp, paper and paper products, publishing and printing 9.4 -0.4 -0.2 4.1 0.4 4.3 9.8 3.4

Coke, refined petroleum products and nuclear fuel 2.1 -9.0 -6.5 2.3 -17.8 15.9 19.9 5.3

Chemicals, chemical products, man-made fibres, rubber and plastic products 9.2 13.0 11.3 18.3 -1.3 9.3 11.9 6.7

Other non-metallic mineral products, basic metals and fabricated metal products 9.6 13.7 6.5 13.9 0.4 9.4 8.0 13.4

Machinery and equipment n.e.c. and manufacture of electrical and optical equipment 20.0 14.6 12.5 18.2 -0.1 1.9 14.6 3.7

of which:

Machinery and equipment n.e.c 5.6 15.9 14.7 13.7 4.9 7.3 6.5 4.5

Electrical and optical equipment 14.4 14.2 11.7 19.9 -1.9 -0.1 17.7 3.3


16.0 8.8 2.7 5.2 4.9 0.7 5.9 7.9

of which:

Motor vehicles, trailers and semi-trailers 14.3 11.1 4.5 0.8 5.2 3.4 2.8 4.4

Furniture; other manufacturing industries n.e.c 3.3 4.5 -0.7 13.0 20.0 7.6 55.0 11.2


Notes: (a) For 2005 values computed according to the new methodology of INE do not include the breakdown by NACE, and therefore this table only shows values up to 2004. (b) This item includes the values of imports and exports of aeronautic material for repair.

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Table A.3.15

PORTUGUESE IMPORTS OF GOODS BY GROUPS OF PRODUCTS(a)

Real rate of change

Per cent

NACE - Statistical classification of economic activities Weights in 2003 1998 1999 2000 2001 2002 2003 2004

Total 100.0 14.5 9.4 5.4 2.2 -1.2 0.5 7.6

Agriculture, hunting, forestry, fishing, and manufacture of food products, beverages and tobacco 14.0 12.4 3.6 1.6 5.3 0.3 1.1 2.1

Mining and quarrying 7.6 4.8 8.5 -4.1 5.5 -1.0 2.5 2.9

Textiles, textile products, leather and leather products 8.7 9.7 4.3 6.6 2.9 -1.3 1.1 3.8

of which:

Textiles 4.3 10.8 1.0 6.1 -1.5 -3.5 -1.1 -2.5

Wearing apparel; dressing and dyeing of fur 2.4 11.8 11.3 10.4 8.6 9.6 7.9 15.3

Leather and leather products 2.0 5.3 6.4 4.0 8.5 -6.8 -1.7 4.1

Wood, wood products, pulp, paper and paper products, publishing and printing 4.0 11.9 9.0 11.7 0.9 4.0 -0.6 6.4

Coke, refined petroleum products and nuclear fuel 2.4 14.0 17.4 11.0 0.1 8.6 -17.3 0.9

Chemicals, chemical products, man-made fibres, rubber and plastic products 14.8 9.6 8.8 3.9 6.7 8.3 1.4 6.0

Other non-metallic mineral products, basic metals and fabricated metal products 9.7 14.2 12.9 11.2 1.0 3.1 -2.3 9.3

Machinery and equipment n.e.c. and manufacture of electrical and optical equipment 21.8 19.9 7.0 8.4 4.1 -6.9 6.3 11.8

of which:

Machinery and equipment n.e.c 7.4 18.0 5.9 10.7 -3.7 -11.1 -4.8 8.4

Electrical and optical equipment 14.3 21.3 7.7 6.9 9.2 -4.4 12.5 13.6


14.3 21.3 16.3 8.3 -6.4 -9.7 -6.4 13.7

of which:

Motor vehicles, trailers and semi-trailers 12.5 19.7 14.2 7.8 -5.6 -5.2 -11.9 12.1

Furniture; other manufacturing industries n.e.c 2.2 16.1 14.4 -1.0 -1.2 13.3 5.1 7.9


Notes: (a) For 2005 values computed according to the new methodology of INE do not include the breakdown by NACE, and therefore this table only shows values up to 2004. (b) This item includes the values of imports and exports of aeronautic material for repair.

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Table A.3.16

HOUSEHOLD DISPOSABLE INCOME(a)

EUR millions

2000 2001 2002 2003(b)

2004(b)

2005

Compensation of employees(c)

61 015 64 359 67 645 69 182 (68890) 72 099 74 968

Corporate and property income 26 963 28 165 28 607 29 418 28 830 28 736

Current transfers 22 666 24 733 25 900 27 413 29 847 31 495

Domestic transfers 19 098 21 026 23 063 24 933 27 355 29 312

External transfers 3 568 3 707 2 837 2 481 2 492 2 183

Direct taxation (-) 7 160 7 536 7 639 7 753 (7572) 7 824 8 239

Social contributions (-) 17 470 18 532 19 526 20 370 (20063) 21 335 22 147

Adjustment for the change in the net equity of households in pension funds reserves 840 574 410 179 628 786

Household disposable income 86 854 91 763 95 397 98 068 (98265) 102 246 105 599

Nominal rate of change, per cent 7.8 5.7 4.0 2.8 (3.0) 4.3 (4.1) 3.3

Memo:

Private consumption 78 100 81 797 85 385 87 854 92 085 95 897

Saving 8 754 9 966 10 012 10 215 (10411) 10 160 9 701

Saving rate (as a percentage of disposable income) 10.1 10.9 10.5 10.4 (10.6) 9.9 9.2


Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003. (b) In brackets, figures adjusted for the direct effects of the sale of tax credits by the general government. (c) Remuneration received by resident households. Includes employers’ social contributions and state transfers to Caixa

Geral de Aposentações.

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Table A.3.17

LENDING/BORROWING REQUIREMENTS BY INSTITUTIONAL SECTOR(a)


2000 2001 2002 2003(c)

2004(c)

2005

Households

Saving 7.2 7.7 7.4 7.4 (7.5) 7.1 6.6

Capital transfers(b)

1.7 2.4 2.7 2.0 1.9 2.6

Investment 7.8 7.5 7.2 6.0 6.0 5.9

Net lending (+) / net borrowing (-) 1.1 2.6 2.9 3.4 (3.5) 2.9 3.4

Non-financial corporations

Saving 7.6 8.2 8.3 9.4 (10.5) 8.6 6.8


-0.3 -0.7 -0.8 -1.2 (-0.3) -0.2 (0.2) 0.0

Investment 15.4 14.9 13.6 12.7 12.6 11.9

Net lending (+) / net borrowing (-) -8.1 -7.4 -6.0 -4.5 (-2.4) -4.2 (-3.8) -5.1

Financial sector

Saving 1.9 2.0 2.0 1.5 2.1 2.5


-0.2 -1.0 -1.5 -0.4 -2.1 (-0.4) -1.3

Investment 0.7 0.8 1.0 0.9 1.3 1.5

Net lending (+) / net borrowing (-) 1.0 0.2 -0.4 0.1 -1.3 (0.5) -0.4

General government(c)

Saving 0.6 -0.6 -0.3 -1.4 (-2.7) -2.2 -2.8


0.2 0.2 1.0 1.6 (0.7) 2.0 (-0.1) -0.1

Investment 3.8 3.9 3.5 3.1 3.0 3.1

Net lending (+) / net borrowing (-) -3.0 -4.3 -2.9 -2.9 (-5.2) -3.2 (-5.3) -6.0

External

Saving 10.4 9.8 7.8 5.9 7.3 9.3


-1.4 -0.9 -1.5 -1.9 -1.6 -1.2

Net lending (+) / net borrowing (-) 9.0 8.9 6.4 4.0 5.7 8.1

Memo:

Domestic Saving 17.3 17.3 17.4 16.9 15.6 13.1

Investment 27.7 27.1 25.2 22.7 22.9 22.4


Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003. (b) Net amount, i.e. difference between transfers received from other sectors and those paid to other sectors, including net acquisitions of non-financial non-produced assets. (c) In 2003 and 2004, figures adjusted for the direct

effects of the sale of tax credits by the general government and for the effects of the transfers of assets from public owned corporations to the general government. For further details, see “Box 6.1 Budgetary effects of the temporary measures implemented in 2002-2004 ”, in Chapter 6 Public Finances, Annual Report 2004.

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Table A.3.18

BALANCE OF PAYMENTS

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Current account -3 873 -5 876 -7 590 -9 786 -12 687 -12 700 -10 626 -8 115 -10 396 -13 645

Goods -7 583 -9 179 -11 514 -13 571 -15 753 -15 543 -14 094 -12 507 -14 985 -16 774

Services 1 084 1 274 1 720 1 839 2 172 2 869 3 339 3 578 4 173 4 094

Transport -244 -305 -270 -428 -537 -562 -301 -88 -15 118

Travel and tourism 1 923 2 245 2 819 2 833 3 298 3 762 3 847 3 718 4 083 3 902

Insurance -33 -38 -12 -31 -44 -40 -73 -70 -86 -100

Royalties and licence fees -196 -228 -234 -260 -267 -251 -303 -239 -253 -214

Other services -186 -247 -416 -140 -145 20 188 265 428 389

Government services -180 -155 -167 -135 -132 -59 -19 -8 17 -0

Income -776 -1 285 -1 466 -1 668 -2 744 -3 760 -2 820 -2 059 -2 375 -3 161

Compensation of employees 36 25 69 28 27 -23 -37 -12 -71 -102

Investment income -812 -1 310 -1 535 -1 696 -2 771 -3 738 -2 783 -2 047 -2 304 -3 059

Direct investment -527 -652 -750 -924 -1 322 -1 435 -869 -717 -559 -857

Portfolio investment -7 -418 -572 -186 -463 -295 -360 -217 -220 -371

Other investment -278 -240 -214 -586 -986 -2 008 -1 555 -1 113 -1 525 -1 831

Current transfers 3 402 3 315 3 670 3 614 3 638 3 735 2 949 2 873 2 790 2 196

Official transfers 770 423 681 511 153 172 300 578 534 310

With the EU 819 410 681 571 245 262 471 765 694 534

Private transfers 2 632 2 892 2 989 3 103 3 485 3 564 2 649 2 295 2 256 1 886

Emigrants/immigrants remittances 2 582 2 843 2 915 2 988 3 269 3 327 2 382 1 967 1 957 1 714

Capital account 1 724 2 446 2 248 2 324 1 670 1 198 1 996 2 652 2 231 1 740

Capital transfers 1 724 2 426 2 235 2 332 1 652 1 215 1 994 2 639 2 193 1 691

Official transfers 1 724 2 404 2 213 2 317 1 649 1 208 2 049 2 722 2 303 1 794

With the EU 1 729 2 294 2 223 2 305 1 672 1 259 1 950 2 743 2 323 1 844

Private transfers 0 22 22 15 3 7 -55 -83 -111 -102

Acquisition/disposal of non-produced non-financial assets -0 20 13 -9 18 -17 2 13 38 48

Financial Account(a)

3 034 3 837 4 754 8 452 11 016 11 005 7 749 6 226 9 123 12 873

Errors and omissions(b)

-886 -407 587 -990 1 497 881 -763 -958 -968

Memo:

Current account + Capital account -2 149 -3 430 -5 342 -7 462 -11 017 -11 501 -8 630 -5 463 -8 165 -11 905


Notes: (a) For a breakdown of the financial account, see Table A.7.1. (b) A positive (negative) sign denotes credit (debit) not registered in other items of the balance of payments.

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Table A.3.19

BALANCE OF PAYMENTS


1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Current account -4.3 -6.0 -7.1 -8.6 -10.4 -9.8 -7.8 -5.9 -7.3 -9.3

Goods -8.4 -9.4 -10.8 -11.9 -12.9 -12.0 -10.4 -9.1 -10.5 -11.4

Services 1.2 1.3 1.6 1.6 1.8 2.2 2.5 2.6 2.9 2.8

Transport -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.2 -0.1 0.0 0.1

Travel and tourism 2.1 2.3 2.6 2.5 2.7 2.9 2.8 2.7 2.9 2.7

Insurance 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1

Royalties and licence fees -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.1

Other services -0.2 -0.3 -0.4 -0.1 -0.1 0.0 0.1 0.2 0.3 0.3

Government services -0.2 -0.2 -0.2 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0

Income -0.9 -1.3 -1.4 -1.5 -2.2 -2.9 -2.1 -1.5 -1.7 -2.1

Compensation of employees 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 -0.1

Investment income -0.9 -1.3 -1.4 -1.5 -2.3 -2.9 -2.1 -1.5 -1.6 -2.1

Direct investment -0.6 -0.7 -0.7 -0.8 -1.1 -1.1 -0.6 -0.5 -0.4 -0.6

Portfolio investment 0.0 -0.4 -0.5 -0.2 -0.4 -0.2 -0.3 -0.2 -0.2 -0.3

Other investment -0.3 -0.2 -0.2 -0.5 -0.8 -1.6 -1.1 -0.8 -1.1 -1.2

Current transfers 3.8 3.4 3.4 3.2 3.0 2.9 2.2 2.1 2.0 1.5

Official transfers 0.9 0.4 0.6 0.4 0.1 0.1 0.2 0.4 0.4 0.2

With the EU 0.9 0.4 0.6 0.5 0.2 0.2 0.3 0.6 0.5 0.4

Private transfers 2.9 3.0 2.8 2.7 2.9 2.8 2.0 1.7 1.6 1.3

Emigrants/immigrants remittances 2.9 2.9 2.7 2.6 2.7 2.6 1.8 1.4 1.4 1.2

Capital account 1.9 2.5 2.1 2.0 1.4 0.9 1.5 1.9 1.6 1.2

Capital transfers 1.9 2.5 2.1 2.0 1.4 0.9 1.5 1.9 1.5 1.2

Official transfers 1.9 2.5 2.1 2.0 1.3 0.9 1.5 2.0 1.6 1.2

With the EU 1.9 2.3 2.1 2.0 1.4 1.0 1.4 2.0 1.6 1.3

Private transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1

Acquisition/disposal of non-produced non-financial assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Financial Account(a)

3.4 3.9 4.5 7.4 9.0 8.5 5.7 4.5 6.4 8.8

Errors and omissions(b)

-1.0 -0.4 0.6 -0.9 0.0 0.4 0.7 -0.6 -0.7 -0.7

Memo:

Current account + Capital account -2.4 -3.5 -5.0 -6.5 -9.0 -8.9 -6.4 -4.0 -5.7 -8.1


Notes: (a) For a breakdown of the financial account, see Table A.7.1. (b) A positive (negative) sign denotes credit (debit) not registered in other items of the balance of payments.

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Table A.3.20

TRANSFERS WITH THE EUROPEAN UNION

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Debits 1 076 1 113 1 188 1 269 1 299 1 253 1 365 1 404 1 325 1 439

Financial contributions 906 917 986 1 063 1 095 1 066 1 220 1 270 1 159 1 280

Customs and levelling duties 132 153 176 202 199 182 143 130 162 144

Other debits 38 43 26 4 5 5 3 4 3 15

Credits 3 624 3 817 4 093 4 145 3 216 2 775 3 787 4 913 4 342 3 826

Current credits 1 895 1 523 1 869 1 840 1 544 1 515 1 836 2 170 2 018 1 982

Reimbursements 206 7 2 71 21 9 95 6 24 6

EAGGF - Guarantee 631 645 639 653 653 875 758 850 823 892

EAGGF - Guidance 62 62 71 77 63 8 53 58 72 50

ERDF 227 256 225 265 222 139 234 393 299 240

ESF 644 378 727 610 509 444 654 765 732 696

Other credits 127 175 204 163 76 41 42 99 68 98

Capital credits 1 729 2 294 2 223 2 305 1 672 1 259 1 950 2 743 2 323 1 844

Cohesion fund 180 579 627 480 116 442 395 266 316 270

EAGGF - Guidance 246 249 286 308 253 32 212 233 290 202

ERDF 1 284 1 449 1 295 1 502 1 260 786 1 328 2 225 1 696 1 362

Other credits 18 17 15 14 43 0 15 20 21 10

Balance 2 548 2 704 2 905 2 876 1 917 1 521 2 421 3 509 3 017 2 387

As a percentage of GDP 2.8 2.8 2.7 2.5 1.6 1.2 1.8 2.5 2.1 1.6


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Table A.4.1

EMPLOYMENT AND UNEMPLOYMENT

1998 1999 2000 2001 2002 2003 2004 2005 2004 2005

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

In thousands

Resident population 10 129 10 167 10 223 10 294 10 366 10 445 10 509 10 563 10 485 10 497 10 516 10 536 10 544 10 554 10 569 10 585

Labour force 5 103 5 143 5 226 5 325 5 408 5 460 5 488 5 545 5 454 5 472 5 501 5 524 5 507 5 531 5 560 5 581

Total employment 4 851 4 916 5 021 5 112 5 137 5 118 5 123 5 123 5 107 5 125 5 126 5 134 5 094 5 132 5 130 5 134

Employees 3 457 3 556 3 650 3 711 3 748 3 736 3 782 3 814 3 739 3 799 3 784 3 807 3 768 3 813 3 831 3 843

Permanent contract 2 863 2 891 2 922 2 957 2 943 2 968 3 032 3 071 2 980 3 045 3 034 3 069 3 047 3 072 3 068 3 096

Fixed-term contract 420 466 501 556 597 581 570 580 573 569 572 567 565 582 593 582

Other dependent labour 174 199 227 198 209 187 180 163 187 185 178 171 155 160 171 166

By sector

Agriculture and fishing 653 623 635 653 637 642 618 606 618 619 620 615 602 605 614 604

Manufacturing, construction, energy and water 1 705 1 692 1 734 1 729 1 728 1 653 1 596 1 567 1 596 1 601 1 592 1 595 1 565 1 566 1 571 1 565

Manufacturing 1 141 1 107 1 094 1 096 1 052 1 019 1 002 969 990 1 004 1 002 1 014 982 973 962 957

Construction 516 537 594 579 618 584 548 554 557 553 548 534 540 550 566 561

Services 2 494 2 601 2 652 2 730 2 773 2 823 2 909 2 950 2 893 2 904 2 913 2 924 2 927 2 962 2 946 2 965

Unemployed 252 226 206 214 271 342 365 422 347 347 376 390 413 399 430 447

In percentage

Participation rate

Total 50.4 50.6 51.1 51.7 52.2 52.3 52.2 52.5 52.0 52.1 52.3 52.4 52.2 52.4 52.6 52.7

Aged 15-64 70.4 70.6 71.2 72.0 72.6 72.8 72.9 73.4 72.6 72.8 73.1 73.3 73.1 73.2 73.5 73.7

Male aged 15-64 78.9 78.7 78.9 79.4 79.8 79.4 79.0 79.0 78.9 79.0 79.1 79.1 78.9 78.9 79.1 79.3

Female aged 15-64 62.2 62.7 63.8 64.8 65.6 66.5 67.0 67.9 66.4 66.7 67.2 67.7 67.5 67.7 68.1 68.3

Unemployment rate

Total 5.0 4.4 3.9 4.0 5.0 6.3 6.7 7.6 6.4 6.3 6.8 7.1 7.5 7.2 7.7 8.0

Male 3.9 3.9 3.1 3.2 4.1 5.5 5.8 6.7 5.5 5.6 6.0 6.3 6.5 6.5 6.7 7.0

Female 6.2 5.0 4.9 5.0 6.0 7.2 7.6 8.7 7.4 7.2 7.8 7.9 8.6 8.1 8.9 9.2

Youth 10.4 8.8 8.6 9.4 11.6 14.5 15.3 16.1 15.5 14.0 16.0 15.8 16.0 15.3 16.5 16.4

Unemployment due to reasons for job seeking

First-job seekers 17.8 14.9 13.3 16.0 15.2 13.5 13.4 13.9 13.4 11.4 15.0 13.7 13.4 11.9 15.6 14.5

Collective dismissal and firm closure 16.6 15.5 16.8 13.9 12.7 13.0 16.8 19.5 14.3 17.4 17.1 18.1 18.8 19.5 19.7 19.9

Individual dismissal 9.6 11.0 11.7 14.0 16.0 19.6 20.0 18.3 19.2 20.4 19.1 21.1 20.1 18.9 16.2 18.0

End of a fixed-term contract 27.6 28.9 28.4 27.9 27.7 26.1 24.1 23.4 25.5 24.1 24.0 23.2 23.3 23.0 23.8 23.6

End of contract by mutual agreement 13.6 15.0 16.2 8.5 8.8 9.9 10.9 11.8 11.8 11.1 10.3 10.4 11.0 12.6 11.9 11.8

Other reasons 14.7 14.8 13.8 19.7 19.6 17.9 14.8 13.2 15.8 15.6 14.5 13.6 13.4 14.2 13.0 12.2

Share of part-time workers 11.0 11.0 10.9 11.1 11.2 11.7 11.3 11.2 11.4 11.2 11.2 11.5 11.5 11.5 11.1 10.9

Rates of change, per cent

Average working hours - -1.1 -0.6 -0.6 0.1 -0.8 0.0 0.1 -0.2 0.6 -0.1 -0.2 0.0 -0.4 0.3 0.4

Total employment (National accounts) - 1.9 2.3 1.5 0.5 -0.4 - - - - - - - - - -

Sources: INE (Labour Force Survey, unless otherwise indicated) and Banco de Portugal.

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Table A.4.2

LABOUR COSTS

Average rate of change

Per cent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Compensation per employee(a)

Whole economy(b)

Nominal 6.1 5.9 5.1 5.3 5.6 4.3 3.0 2.2 (1,8) 2.3 (2.8) 3.0

Real(c)

3.1 2.9 2.7 3.0 2.1 0.9 0.0 -0.6 (-1.1) -0.1 (0.3) 0.7

Corporate sector

Nominal 6.1 5.9 4.9 4.7 5.1 3.9 2.7 2.6 (2.0) 2.5 (3.2) 3.2

Real(c)

3.1 2.9 2.5 2.4 1.7 0.5 -0.3 -0.3 (-0.9) 0.1 (0.7) 0.8

Collective bargaining

Total excluding general government 4.4 3.5 3.1 3.3 3.5 3.9 3.6 2.8 2.9 2.6

Industry 4.4 3.5 3.1 3.5 3.9 3.9 3.6 2.7 2.9 2.7

Services 4.4 3.5 3.2 3.3 3.4 4.0 2.9 3.0 2.9 2.6

Sources: INE (National accounts for the period 1996-2003 and Labour force survey for 2004 and 2005), Ministério do Trabalho e da Solidariedade Social and Banco de Portugal.

Notes: (a) In brackets, figures adjusted for the direct effects of the sale of tax credits by the general government. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented in 2002-2004”, Annual Report 2004. (b) Average compensation per employee, gross of contributions and income taxes, not in-

cluding the State transfers to Caixa Geral de Aposentações. (c) Deflated using the private consumption deflator.

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Table A.5.1

PRICE AND NON-WAGE COST INDICATORS

Rates of change

Per cent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Consumer Price Index 3.1 2.2 2.8 2.3 2.9 4.4 3.6 3.3 2.4 2.3

GDP deflator 2.6 3.8 3.8 3.3 3.0 3.7 3.9 3.0 2.6 2.4

Industrial production price index

Manufacturing 5.2 3.7 -4.7 3.6 20.5 2.7 0.4 0.4 2.9 3.5

Manufacturing excluding fuel 1.1 2.3 0.5 -0.1 3.9 2.3 0.4 0.3 1.7 1.3

Import prices of goods(a)

Total 1.3 2.3 -1.6 -0.5 8.8 -0.1 -2.4 -2.5 2.1 4.1

Consumer goods 1.7 3.6 2.4 0.6 3.4 3.6 -1.7 -3.3 -1.7 -1.6

Food 1.8 2.2 3.7 0.6 4.3 3.4 -1.9 -4.3 1.1 0.4

Non-food 1.8 4.5 2.1 -0.7 4.5 2.8 -2.0 -3.6 -3.9 -2.9

Passenger vehicles 1.0 4.2 0.4 3.6 -0.6 6.6 2.8 0.5 0.4 -0.5

Capital goods 0.8 2.7 0.6 0.0 4.0 -0.4 -1.4 -3.6 -0.3 -1.0

Transport equipment 0.2 5.5 1.5 0.6 3.5 3.2 0.6 0.1 0.1 -0.4

Other capital goods 1.1 1.3 0.3 -0.3 4.3 -2.2 -2.1 -5.3 -0.5 -1.3

Fuels 18.5 5.5 -27.9 26.8 76.3 -7.0 -7.1 5.4 15.1 31.5

Intermediate goods -1.0 1.0 -0.7 -4.1 5.0 -0.7 -2.4 -2.9 2.4 2.0

International commodity prices

Oil prices (Brent), USD 19.5 -4.3 -30.8 34.1 58.6 -12.5 0.4 13.6 33.5 45.0

Oil prices (Brent), EUR 23.1 7.1 -30.0 41.0 83.0 -9.8 -4.9 -5.0 21.4 45.0

Non-energy commodity prices, USD -9.1 2.2 -16.0 -10.8 4.2 -10.7 4.5 14.3 21.7 9.5

Food 1.9 7.3 -17.2 -20.0 -8.9 -8.7 15.4 10.3 12.4 -1.1

Industrial -15.7 -1.5 -15.0 -3.7 12.7 -11.7 -1.3 16.8 27.2 15.0

Non-energy commodity prices, EUR -6.4 14.5 -14.7 -6.4 20.4 -8.1 -0.9 -4.5 10.8 9.4

Food 4.9 20.3 -16.0 -16.2 5.2 -5.9 9.2 -7.7 2.4 -1.3

Industrial -13.2 10.3 -13.7 1.2 30.1 -9.2 -6.3 -2.6 15.8 15.0

Memo:

Nominal effective exchange rate index for Portugal(b)

-0.5 -1.9 -1.2 -1.2 -2.3 0.3 0.7 2.6 0.6 -0.2

Sources: Eurostat, HWWA, INE, Thomson Financial Datastream and Banco de Portugal.

Notes: (a) Computed by Banco de Portugal on the basis of information made available by INE. The classification of main categories is somewhat different from that of INE as passenger vehicles are considered as consumer goods and not as equipment goods. (b) A positive change corresponds to an appreciation of the index. The

index includes a group of 13 trading partners until 1999; from 1999 onwards, the index includes a group of 22 trading partners. For a detailed description of the methodology, see Gouveia, A.C. and Coimbra, C. (2004), “New effective exchange rate index for the Portuguese economy” Economic Bulletin, December, Banco de

Portugal.

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Table A.5.2

CPI – MAIN CATEGORIES AND AGGREGATES(a)

Annual average rates of change

Per cent

Weights in 2005 1998 1999 2000 2001 2002 2003 2004 2005

Total 100.0 2.8 2.3 2.9 4.4 3.6 3.3 2.4 2.3

Total excluding unprocessed food and energy 79.6 2.5 2.7 2.5 3.6 4.4 3.2 2.4 1.8

Aggregates

Goods 64.9 1.9 1.7 2.2 4.2 2.4 2.7 1.6 1.9

Food 22.4 3.8 2.7 1.9 6.1 1.9 2.9 1.4 0.2

Unprocessed 11.4 6.0 2.7 2.5 8.8 0.3 2.6 0.0 -0.5

Processed 10.9 1.5 2.8 1.4 3.1 3.8 3.1 2.9 0.8

Industrial 42.6 0.8 1.1 2.4 3.1 2.7 2.6 1.7 2.8

Non-energy 33.6 0.8 1.8 1.4 2.5 3.1 2.0 0.8 1.0

Energy 8.9 0.6 -1.9 6.1 5.2 1.2 4.9 5.4 9.9

Services 35.1 4.9 3.7 4.2 4.8 6.0 4.5 3.8 3.0

Categories

Food and non-alcoholic beverages 19.3 3.5 2.2 2.1 6.5 1.5 2.6 1.1 -0.6

Alcoholic beverages and tobacco 3.0 4.9 7.2 0.8 3.2 4.8 4.6 3.0 4.8

Clothing and footwear 7.0 -1.0 0.4 0.8 1.5 2.5 1.3 -1.1 -1.1

Housing, water, electricity, gas and other fuels 10.2 2.7 0.8 3.7 3.9 2.9 4.0 3.0 4.4

Furnishings, household equipment and routine maintenance of the house 7.9 2.1 2.2 2.0 3.2 3.1 2.6 1.6 1.3

Health 5.5 4.6 4.2 3.1 3.6 4.8 1.9 1.7 0.9

Transport 19.7 2.4 2.9 4.8 4.8 5.0 4.3 3.5 5.8

Communications 3.2 -3.9 -3.7 -4.8 -2.2 0.8 -1.3 -1.0 -0.2

Recreation and culture 4.9 -0.3 0.7 0.8 2.2 2.2 1.7 2.8 1.6

Education 1.7 18.7 4.8 5.0 5.2 5.8 5.6 9.3 7.0

Hotels, cafes and restaurants 11.3 3.3 2.9 3.6 4.2 5.7 5.7 4.6 2.4

Miscellaneous goods and services 6.4 3.5 3.8 4.3 5.5 5.8 4.0 2.6 2.2


Note: (a) Up to December 2002, the rates of change were calculated using 1997-based CPI. From January 2003 onwards, the rates of change are calculated using the 2002-based CPI.

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Table A.5.3

PORTUGAL AND EURO AREA – MAIN HICP AGGREGATES

Average rates of change

Per cent

Weights

in 2005

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Portugal

Total 100.0 2.9 1.9 2.2 2.2 2.8 4.4 3.7 3.3 2.5 2.1

Aggregates

Goods 61.9 2.2 1.1 1.7 1.7 2.2 4.2 2.4 2.4 1.6 1.9

Food 21.5 2.3 0.4 3.8 2.8 2.0 6.1 1.9 2.6 1.4 0.1

Unprocessed 10.9 0.6 1.5 6.6 2.8 2.5 8.9 0.2 2.1 0.0 -0.5

Processed 10.7 4.2 -0.7 1.0 2.8 1.4 3.1 3.8 3.1 2.8 0.8

Industrial 40.3 2.0 1.6 0.2 1.0 2.4 3.1 2.7 2.4 1.8 2.8

Non-energy 31.8 2.3 1.2 0.1 1.8 1.5 2.5 3.1 1.8 0.8 1.0

Energy 8.5 0.9 3.8 0.6 -1.8 6.1 5.2 1.2 4.9 5.4 10.0

Services 38.1 5.0 4.0 3.6 3.3 4.0 4.7 5.9 4.6 3.9 2.5

Euro area

Total 100.0 2.2 1.6 1.1 1.1 2.1 2.3 2.3 2.1 2.1 2.2

Aggregates

Goods 59.0 1.9 1.2 0.7 0.9 2.5 2.3 1.7 1.8 1.8 2.1

Food 19.6 1.9 1.4 1.6 0.6 1.4 4.5 3.1 2.8 2.3 1.5

Unprocessed 7.6 1.7 1.4 2.0 0.0 1.8 7.0 3.1 2.1 0.6 0.8

Processed 12.0 2.0 1.4 1.4 0.9 1.2 2.9 3.1 3.3 3.4 2.0

Industrial 39.4 1.8 1.0 0.2 1.0 3.0 1.2 1.0 1.2 1.6 2.4

Non-energy 30.8 1.5 0.6 0.9 0.7 0.5 0.9 1.5 0.8 0.8 0.3

Energy 8.5 3.0 2.7 -2.6 2.4 13.0 2.2 -0.6 3.0 4.5 10.1

Services 41.0 2.8 2.4 1.9 1.5 1.5 2.5 3.1 2.5 2.6 2.3

Source: Eurostat.

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Table A.6.1

GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING)(a)

EUR millions

1999 2000 2001 2002 2003 2004 2005

Total revenue 46 192 49 114 51 844 56 032 59 026 61 680 61 582

Current revenue 44 271 47 457 49 665 53 693 55 244 56 602 59 563

Tax revenue 38 952 42 188 44 336 47 669 49 274 50 515 53 545

Taxes on income and wealth 10 662 12 016 12 130 12 574 11 954 12 388 12 717

Taxes on households 6 406 7 160 7 536 7 639 7 753 7 824 8 239

Taxes on corporations 4 256 4 856 4 594 4 935 4 201 4 563 4 478

Taxes on production and imports 15 962 16 490 17 469 19 223 20 404 20 435 22 487

of which:

Value added tax 8 335 9 228 9 583 10 597 11 681 11 330 12 771

Tax on oil products 2 567 2 011 2 456 2 922 3 105 3 125 3 134

Car tax 1 237 1 233 1 193 1 150 985 1 121 1 174

Social contributions 12 328 13 682 14 738 15 872 16 916 17 692 18 341

Actual 11 531 12 636 13 609 14 613 15 340 16 125 16 628

General scheme 8 192 8 935 9 748 10 287 10 606 10 751 11 089

Civil servants scheme 3 339 3 701 3 861 4 326 4 734 5 374 5 539

Imputed 797 1 047 1 129 1 259 1 575 1 568 1 713

Sales of goods and services 2 899 3 199 3 155 3 293 3 307 3 427 3 602

Other current revenue 2 420 2 070 2 173 2 732 2 664 2 660 2 416

Capital revenue 1921 1657 2180 2338 3782 5078 2018

Capital taxes 94 103 91 105 105 25 19

Transfers from the European Union 1 699 1 496 1 829 1 948 1 858 1 610 1 451

Other capital transfers 128 58 259 286 1 818 3 443 548

Total expenditure 49 290 52 659 57 360 59 896 63 025 66 245 70 448

Current expenditure 42 724 46 655 50 429 54 116 57 134 59 781 63 807

Compensation of employees 15 600 17 329 18 516 19 907 19 627 20 589 21 386

Intermediate consumption 4 679 5 295 5 606 5 709 5 302 5 532 5 905

Interest on public debt 3 446 3 655 3 851 3 868 3 775 3 785 4 019

Current transfers 18 999 20 376 22 457 24 633 28 430 29 875 32 497

to households 14 945 16 500 18 001 19 772 23 335 24 306 26 467

in cash 12 855 14 278 15 517 17 043 19 034 20 235 21 828

in kind 2 090 2 222 2 485 2 729 4 300 4 071 4 639

to corporations (subsidies) 1 963 1 519 1 781 2 092 2 499 2 218 2 325

other transfers 2 091 2 357 2 674 2 769 2 596 3 351 3 705

Capital expenditure 6 567 6 005 6 931 5 780 5 892 6 463 6 641

Investment 4 628 4 586 4 992 4 793 4 324 4 292 4 500

Other capital expenditure 1 939 1 419 1 938 986 1 567 2 171 2 141

Overall balance -3 098 -3 545 -5 516 -3 864 -4 000 -4 565 -8 867

Memo:

Primary current expenditure 39 278 42 999 46 579 50 248 53 359 55 997 59 789

Primary balance 347 110 -1 665 4 -225 -780 -4 848

Public debt 58 657 61 729 68 364 75 211 78 433 83 781 94 071


Note: (a) The accounts for the 1996-1998 period are not shown, because they have not yet been compiled by the National Statistical Institute in the new national accounts base (2000 base). For the values for this period in the 1995 base of the national accounts, see the 2004 Annual Report.

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GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING)(a)


1999 2000 2001 2002 2003 2004 2005

Total revenue 40.5 40.2 40.1 41.4 42.8 43.1 41.9

Current revenue 38.8 38.8 38.4 39.6 40.1 39.6 40.5

Tax revenue 34.1 34.5 34.3 35.2 35.7 35.3 36.4

Taxes on income and wealth 9.3 9.8 9.4 9.3 8.7 8.7 8.7

Taxes on households 5.6 5.9 5.8 5.6 5.6 5.5 5.6

Taxes on corporations 3.7 4.0 3.6 3.6 3.0 3.2 3.0

Taxes on production and imports 14.0 13.5 13.5 14.2 14.8 14.3 15.3

of which:

Value added tax 7.3 7.5 7.4 7.8 8.5 7.9 8.7

Tax on oil products 2.2 1.6 1.9 2.2 2.3 2.2 2.1

Car tax 1.1 1.0 0.9 0.8 0.7 0.8 0.8

Social contributions 10.8 11.2 11.4 11.7 12.3 12.4 12.5

Actual 10.1 10.3 10.5 10.8 11.1 11.3 11.3

General scheme 7.2 7.3 7.5 7.6 7.7 7.5 7.5

Civil servants scheme 2.9 3.0 3.0 3.2 3.4 3.8 3.8

Imputed 0.7 0.9 0.9 0.9 1.1 1.1 1.2

Sales of goods and services 2.5 2.6 2.4 2.4 2.4 2.4 2.5

Other current revenue 2.1 1.7 1.7 2.0 1.9 1.9 1.6

Capital revenue 1.7 1.4 1.7 1.7 2.7 3.5 1.4

Capital taxes 0.1 0.1 0.1 0.1 0.1 0.0 0.0

Transfers from the European Union 1.5 1.2 1.4 1.4 1.3 1.1 1.0

Other capital transfers 0.1 0.0 0.2 0.2 1.3 2.4 0.4

Total expenditure 43.2 43.1 44.4 44.2 45.7 46.3 47.9

Current expenditure 37.4 38.2 39.0 40.0 41.4 41.8 43.4

Compensation of employees 13.7 14.2 14.3 14.7 14.2 14.4 14.5

Intermediate consumption 4.1 4.3 4.3 4.2 3.8 3.9 4.0

Interest on public debt 3.0 3.0 3.0 2.9 2.7 2.6 2.7

Current transfers 16.6 16.7 17.4 18.2 20.6 20.9 22.1

to households 13.1 13.5 13.9 14.6 16.9 17.0 18.0

in cash 11.3 11.7 12.0 12.6 13.8 14.1 14.8

in kind 1.8 1.8 1.9 2.0 3.1 2.8 3.2

to corporations (subsidies) 1.7 1.2 1.4 1.5 1.8 1.6 1.6

other transfers 1.8 1.9 2.1 2.0 1.9 2.3 2.5

Capital expenditure 5.8 4.9 5.4 4.3 4.3 4.5 4.5

Investment 4.1 3.8 3.9 3.5 3.1 3.0 3.1

Other capital expenditure 1.7 1.2 1.5 0.7 1.1 1.5 1.5

Overall balance -2.7 -2.9 -4.3 -2.9 -2.9 -3.2 -6.0

Overall balance excluding temporary measures(a)

-2.7 -3.2 -4.3 -4.2 -5.3 -5.3 -6.0

Memo:

Primary current expenditure 34.4 35.2 36.0 37.1 38.7 39.1 40.7

Primary balance 0.3 0.1 -1.3 0.0 -0.2 -0.5 -3.3

Public debt 51.4 50.5 52.9 55.5 56.9 58.6 64.0


Note: (a) See table A.6.2 of the 2004 Annual Report for an analysis of the impact of temporary measures by revenue and expenditure item.

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Table A.6.3

GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING)

Rate of change

Per cent

2000 2001 2002 2003 2004 2005

Total revenue 6.3 5.6 8.1 5.3 4.5 -0.2

Current revenue 7.2 4.7 8.1 2.9 2.5 5.2

Tax revenue 8.3 5.1 7.5 3.4 2.5 6.0

Taxes on income and wealth 12.7 1.0 3.7 -4.9 3.6 2.7

Taxes on households 11.8 5.2 1.4 1.5 0.9 5.3

Taxes on corporations 14.1 -5.4 7.4 -14.9 8.6 -1.9

Taxes on production and imports 3.3 5.9 10.0 6.1 0.2 10.0

of which:

Value added tax 10.7 3.8 10.6 10.2 -3.0 12.7

Tax on oil products -21.7 22.1 19.0 6.2 0.6 0.3

Car tax -0.3 -3.2 -3.6 -14.4 13.8 4.7

Social contributions 11.0 7.7 7.7 6.6 4.6 3.7

Actual 9.6 7.7 7.4 5.0 5.1 3.1

General scheme 9.1 9.1 5.5 3.1 1.4 3.1

Civil servants scheme 10.8 4.3 12.1 9.4 13.5 3.1

Imputed 31.3 7.9 11.5 25.1 -0.5 9.3

Sales of goods and services 10.4 -1.4 4.4 0.4 3.6 5.1

Other current revenue -14.5 5.0 25.7 -2.5 -0.1 -9.2

Capital revenue -13.7 31.5 7.3 61.7 34.3 -60.3

Capital taxes 9.5 -11.7 15.5 -0.1 -76.5 -23.3

Transfers from the European Union -12.0 22.3 6.5 -4.6 -13.3 -9.9

Other capital transfers -54.6 346.5 10.3 536.3 89.3 -84.1

Total expenditure 6.8 8.9 4.4 5.2 5.1 6.3

Current expenditure 9.2 8.1 7.3 5.6 4.6 6.7

Compensation of employees 11.1 6.9 7.5 -1.4 4.9 3.9

Intermediate consumption 13.2 5.9 1.8 -7.1 4.3 6.7

Interest on public debt 6.1 5.4 0.4 -2.4 0.3 6.2

Current transfers 7.2 10.2 9.7 15.4 5.1 8.8

to households 10.4 9.1 9.8 18.0 4.2 8.9

in cash 11.1 8.7 9.8 11.7 6.3 7.9

in kind 6.3 11.8 9.8 57.6 -5.3 13.9

to corporations (subsidies) -22.7 17.3 17.4 19.5 -11.2 4.8

other transfers 12.7 13.5 3.5 -6.2 29.1 10.6

Capital expenditure -8.6 15.4 -16.6 1.9 9.7 2.7

Investment -0.9 8.9 -4.0 -9.8 -0.8 4.8

Other capital expenditure -26.8 36.6 -49.1 58.9 38.6 -1.4

Memo:

Primary current expenditure 9.5 8.3 7.9 6.2 4.9 6.8


182

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Table A.6.4

STOCK–FLOW ADJUSTMENT

EUR millions

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

General government overall balance (Excessive Deficit Procedure) -4 382 -4 008 -3 275 -3 078 -3 098 -3 545 -5 516 -3 864 -4 000 -4 565 -8 867

Impact of swap and forward rate agreements operations -4 -9 7 -8 -26 -81 -72 -49 -64 -32 68

General government overall balance (ESA95) -4 386 -4 018 -3 268 -3 086 -3 125 -3 626 -5 587 -3 913 -4 064 -4 598 -8 798

Statistical discrepancy 0 0 0 0 0 0 0 0 0 0 0

Net transactions in financial assets and liabilities -4 386 -4 018 -3 268 -3 086 -3 125 -3 626 -5 587 -3 913 -4 064 -4 598 -8 798

Transactions in major assets 1 454 -1 666 -3 320 -1 327 -177 -504 -1 001 2 793 -366 -348 1 256

Currency and deposits 1 794 -218 368 718 721 -678 -1 827 1 574 -1 290 -208 925

Securities -15 144 -105 191 67 283 610 135 114 -145 481

Loans 96 90 97 193 129 164 325 281 423 121 277

Shares and other equity -420 -1 683 -3 680 -2 429 -1 095 -273 -109 803 386 -116 -426

Privatisations -665 -1 900 -4 091 -2 556 -1 493 -2 313 -415 -406 -8 -1 081 -403

Equity injections 173 224 687 660 317 1 115 362 1 115 419 968 278

Other 72 -6 -275 -533 81 925 -56 94 -25 -3 -301

Net transactions in other assets and liabilities 103 965 572 -790 -230 -526 2 708 693 -67 1 416 892

Transactions in other assets -137 903 736 -170 389 492 1 350 182 181 1 332 -802

Transactions in other liabilities -239 -62 164 620 620 1 017 -1 358 -511 247 -83 -1 694

Transactions in major liabilities (debt instruments) 5 943 3 317 521 968 2 717 2 597 7 294 7 399 3 631 5 665 10 947

Currency and deposits 1 360 1 198 708 189 518 1 190 1 094 1 083 418 93 342

Short-term securities 537 53 -1 699 -3 544 -1 100 -333 1 712 -1 787 3 529 5 847 2 502

Medium and long-term securities 4 121 3 267 2 846 4 789 2 951 1 783 3 724 7 541 -460 -1 518 8 260

Loans -74 -1 200 -1 334 -466 348 -43 765 562 143 1 244 -156

of which:

Loans from Banco de Portugal 9 0 1 4 2 -39 0 0 0 0 0

Valuation effects in debt instruments -36 -768 325 -269 367 18 -398 -234 -196 -248 -277

Exchange rate changes -221 -246 530 -136 250 211 -20 101 -185 18 12

Other valuation effects 185 -522 -206 -133 117 -193 -378 -335 -11 -265 -289

Other changes in volume in debt instruments -487 -252 -140 -175 84 457 -262 -318 -213 -70 -380

Change in debt 5 419 2 297 706 525 3 168 3 072 6 635 6 847 3 222 5 347 10 290


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183

Table A.7.1

FINANCIAL ACCOUNT (to be continued)


1996 1997 1998 1999

Change in

liabilities

Change in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change

Current and capital account -2.4 -3.5 -5.0 -6.5

Financial account 11.1 -7.7 3.4 20.0 -16.1 3.9 18.5 -14.0 4.5 13.2 -5.8 7.4

Direct investment 1.1 -0.6 0.5 2.1 -1.9 0.2 2.5 -3.4 -0.9 1.0 -2.6 -1.7

excluding Madeira and Santa Maria (Azores) off-shores 1.1 -0.6 0.6 1.9 -1.5 0.3 1.3 -2.7 -1.4 0.8 -3.5 -2.7

Portfolio investment 3.5 -4.9 -1.4 7.3 -6.8 0.5 4.6 -5.1 -0.5 8.3 -5.3 3.0

Financial derivatives -0.1 0.0 0.0 -0.2 0.2 0.0 -0.8 0.9 0.1 -2.1 2.2 0.2

Other investment 6.5 -1.6 4.8 10.8 -6.5 4.3 12.2 -6.0 6.2 6.0 0.1 6.2

Reserve assets - -0.6 -0.6 - -1.1 -1.1 - -0.4 -0.4 - -0.3 -0.3

By resident institutional sector:

Monetary authorities 0.1 -0.6 -0.5 1.5 -1.1 0.4 0.7 -0.5 0.2 -0.2 -0.8 -1.0

Portfolio investment - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.3 0.3

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other investment 0.1 0.0 0.1 1.5 0.0 1.5 0.7 -0.1 0.6 -0.2 -0.8 -1.0

Reserve assets - -0.6 -0.6 - -1.1 -1.1 - -0.4 -0.4 - -0.3 -0.3

General government 1.4 0.0 1.4 4.2 0.0 4.2 4.2 0.0 4.3 6.3 -0.2 6.1

Direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

excluding Madeira and Santa Maria (Azores) off-shores 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Portfolio investment 1.7 0.0 1.7 4.1 0.0 4.1 4.3 0.0 4.3 6.3 -0.2 6.1

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other investment -0.3 0.0 -0.3 0.1 0.0 0.1 -0.1 0.0 -0.1 0.0 0.0 0.0

Other monetary financial institutions 6.3 -3.5 2.8 9.2 -7.9 1.4 9.1 -3.7 5.4 3.8 2.5 6.3

Direct investment 0.1 -0.1 0.0 0.2 -0.4 -0.2 0.2 -0.1 0.1 -0.5 -0.2 -0.7

excluding Madeira and Santa Maria (Azores) off-shores 0.1 -0.1 0.0 0.0 -0.4 -0.4 0.1 0.0 0.1 -0.6 -0.2 -0.8

Portfolio investment 0.3 -2.6 -2.2 0.8 -2.4 -1.6 -0.7 -1.2 -2.0 0.3 -0.1 0.3

Financial derivatives -0.1 0.0 0.0 -0.2 0.2 0.0 -0.8 0.8 0.1 -1.8 2.0 0.2

Other investment 6.0 -0.9 5.0 8.4 -5.2 3.1 10.5 -3.2 7.2 5.8 0.7 6.5

Non-monetary financial institutions 0.1 -3.4 -3.3 0.1 -3.7 -3.6 1.7 -4.3 -2.6 -0.1 -5.1 -5.2

Direct investment 0.0 -0.1 -0.1 0.0 -0.1 -0.1 1.2 -0.1 1.1 0.0 -0.1 -0.1

excluding Madeira and Santa Maria (Azores) off-shores 0.0 -0.1 -0.1 0.1 -0.1 0.0 0.2 -0.1 0.1 0.0 -0.1 -0.1

Portfolio investment 0.0 -2.1 -2.1 0.1 -3.6 -3.5 0.3 -3.6 -3.3 -0.2 -5.0 -5.2

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.2 0.0

Other investment 0.0 -1.1 -1.1 0.0 0.0 0.0 0.1 -0.5 -0.4 0.2 -0.2 0.1

Non-financial corporations and households 3.1 -0.2 2.9 4.9 -3.4 1.5 2.7 -5.6 -2.8 3.4 -2.2 1.2

Direct investment 1.0 -0.5 0.6 1.8 -1.4 0.5 1.1 -3.2 -2.1 1.5 -2.4 -0.9

excluding Madeira and Santa Maria (Azores) off-shores 1.0 -0.4 0.6 1.8 -1.0 0.8 1.0 -2.6 -1.6 1.4 -3.2 -1.8

Portfolio investment 1.4 -0.2 1.2 2.3 -0.8 1.5 0.7 -0.3 0.4 1.9 -0.3 1.5

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.1 0.0 -0.1 0.1 -0.1

Other investment 0.7 0.4 1.1 0.8 -1.3 -0.4 1.0 -2.1 -1.1 0.2 0.4 0.6

Errors and omissions -1.0 -0.4 0.6 -0.9


Note: A positive (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A negative (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow.

184

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nual

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2005

Table A.7.1

FINANCIAL ACCOUNT (to be continued)


2000 2001 2002

Change in

liabilities

Chang in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change


Financial account 27.1 -18.1 9.0 25.0 -16.4 8.5 14.6 -8.9 5.7

Direct investment 5.9 -7.2 -1.3 5.4 -5.4 0.0 1.4 0.1 1.5

excluding Madeira and Santa Maria (Azores) off-shores 5.7 -4.9 0.8 2.4 -2.3 0.1 1.4 -2.8 -1.4

Portfolio investment 2.4 -4.1 -1.7 9.2 -6.8 2.4 7.9 -5.6 2.3

Financial derivatives -3.0 3.2 0.3 -2.5 2.8 0.3 -3.0 2.9 0.0

Other investment 21.7 -9.6 12.1 12.9 -6.3 6.6 8.3 -5.6 2.7

Reserve assets - -0.3 -0.3 - -0.7 -0.7 - -0.8 -0.8


Monetary authorities 4.1 -0.8 3.3 0.1 -0.4 -0.3 0.7 -0.7 0.1

Portfolio investment - -0.4 -0.4 - 0.4 0.4 - 0.4 0.4

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other investment 4.1 0.0 4.1 0.1 0.0 0.1 0.7 -0.2 0.5

Reserve assets - -0.3 -0.3 - -0.7 -0.7 - -0.8 -0.8

General government 1.9 -0.1 1.8 2.3 0.3 2.6 2.5 0.4 2.9

Direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

excluding Madeira and Santa Maria (Azores) off-shores 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Portfolio investment 2.2 -0.4 1.8 3.0 -0.3 2.8 3.0 -0.3 2.6


Other investment -0.2 0.0 -0.2 -0.2 0.0 -0.2 0.1 0.0 0.1

Other monetary financial institutions 14.8 -3.7 11.0 12.8 0.0 12.7 5.2 0.9 6.0

Direct investment 1.0 -0.9 0.1 0.1 -0.3 -0.2 0.1 0.0 0.2

excluding Madeira and Santa Maria (Azores) off-shores 0.9 -0.9 0.1 0.1 -0.3 -0.2 0.2 0.0 0.2

Portfolio investment 0.2 0.8 1.0 1.8 -0.6 1.2 0.0 -0.5 -0.5

Financial derivatives -2.6 2.8 0.2 -1.6 1.8 0.2 -1.9 1.8 -0.1

Other investment 16.2 -6.5 9.7 12.4 -1.0 11.5 7.0 -0.5 6.5

Non-monetary financial institutions 0.8 -2.0 -1.2 1.0 -5.6 -4.5 2.9 -3.5 -0.6

Direct investment 1.0 -0.2 0.9 0.2 -0.1 0.2 0.4 -0.6 -0.2

excluding Madeira and Santa Maria (Azores) off-shores 1.1 -0.2 0.9 0.2 -0.1 0.2 0.3 -0.6 -0.3

Portfolio investment -0.3 -3.1 -3.4 0.8 -4.4 -3.6 2.0 -3.2 -1.1


Other investment 0.2 1.1 1.3 0.1 -1.3 -1.1 0.6 0.1 0.7

Non-financial corporations and households 5.6 -11.4 -5.9 8.7 -10.8 -2.1 3.3 -6.0 -2.7

Direct investment 3.9 -6.2 -2.3 5.0 -5.1 0.0 0.8 0.7 1.5

excluding Madeira and Santa Maria (Azores) off-shores 3.7 -3.9 -0.1 2.1 -2.0 0.1 0.9 -2.2 -1.3

Portfolio investment 0.3 -1.0 -0.7 3.5 -1.9 1.6 2.9 -2.0 0.9

Financial derivatives -0.1 0.0 -0.1 -0.2 0.2 0.0 -0.2 0.2 0.0

Other investment 1.4 -4.3 -2.8 0.3 -4.0 -3.7 -0.2 -4.9 -5.1

Errors and omissions 0.0 0.4 0.7


Note: A positive (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A negative (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow.

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Table A.7.1

FINANCIAL ACCOUNT (continued)


2003 2004 2005

Change in

liabilities

Chang in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change

Change in

liabilities

Change in

assets

Net

change


Financial account 22.1 (28.0) -17.6 (-23.5) 4.5 15.1 (11.8) -8.7 (-5.4) 6.4 16.2 (14.6) -7.4 (-5.9) 8.8

Direct investment 5.5 -5.2 0.4 1.3 -4.5 -3.1 1.7 -0.6 1.1

excluding Madeira and Santa Maria (Azores) off-shores 0.3 0.4 0.7 1.6 -2.3 -0.7 1.8 -1.1 0.7

Portfolio investment 10.0 -13.7 -3.7 8.1 -7.6 0.5 9.4 -10.5 -1.1

Financial derivatives -2.9 2.9 0.0 -2.4 2.3 -0.1 -2.8 2.7 -0.1

Other investment 9.4 (15.3) -5.9 (-11.7) 3.6 8.0 (4.7) 0.0 (3.3) 8.0 7.8 (6.3) 0.1 (1.6) 7.9

Reserve assets - 4.2 4.2 - 1.1 1.1 - 1.0 1.0


Monetary authorities(a)

-4.1 (1.8) 0.7 -3.3 (2.5) 4.1 (0.9) 1.2 5.3 (2.1) 2.8 (1.3) -0.1 2.7 (1.2)

Portfolio investment - -3.7 -3.7 - 0.7 0.7 - -0.7 -0.7

Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other investment -4.1 (1.8) 0.2 -3.8 (2.0) 4.1 (0.9) -0.5 3.6 (0.3) 2.8 (1.3) -0.4 2.4 (0.9)

Reserve assets - 4.2 4.2 - 1.1 1.1 - 1.0 1.0

General government 3.1 0.2 3.3 4.1 0.3 4.5 5.9 0.3 6.2

Direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

excluding Madeira and Santa Maria (Azores) off-shores 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Portfolio investment 3.7 -0.2 3.4 4.2 -0.1 4.1 6.8 -0.1 6.7

Financial derivatives -0.5 0.4 -0.1 -0.3 0.3 0.0 -0.4 0.4 0.0

Other investment 0.0 0.0 0.0 0.3 0.1 0.4 -0.5 0.0 -0.5

Other monetary financial institutions(a)

11.0 -8.1 (-13.9) 2.9 (-2.9) -0.2 -2.8 (0.5) -3.0 (0.2) -0.3 -1.6 (0.0) -1.8 (-0.3)

Direct investment 0.3 -0.1 0.2 0.1 -0.2 -0.1 0.0 -0.3 -0.3

excluding Madeira and Santa Maria (Azores) off-shores 0.2 -0.1 0.2 0.1 -0.2 -0.1 0.0 -0.3 -0.3

Portfolio investment -0.1 -4.0 -4.1 -0.8 -3.3 -4.1 -3.8 -2.2 -6.0


Other investment 12.6 -5.9 (-11.7) 6.8 (0.9) 1.9 -0.7 (2.5) 1.2 (4.5) 5.2 -0.6 (0.9) 4.5 (6.1)

Non-monetary financial institutions 6.4 -2.7 3.7 3.5 -3.4 0.1 5.3 -6.2 -0.9

Direct investment -0.8 0.2 -0.6 0.0 -0.1 -0.1 0.7 -0.3 0.5

excluding Madeira and Santa Maria (Azores) off-shores -0.4 0.2 -0.3 0.0 -0.1 -0.1 0.8 -0.3 0.5

Portfolio investment 7.6 -3.6 4.1 3.7 -3.6 0.2 4.8 -6.3 -1.5


Other investment 0.1 0.2 0.3 0.2 -0.2 0.0 0.2 -0.2 0.0

Non-financial corporations and households 5.7 -7.8 -2.2 3.6 -4.0 -0.5 2.4 0.2 2.5

Direct investment 6.1 -5.2 0.8 1.3 -4.2 -2.9 1.0 -0.1 0.9

excluding Madeira and Santa Maria (Azores) off-shores 0.5 0.3 0.8 1.6 -2.1 -0.5 1.1 -0.6 0.5

Portfolio investment -1.1 -2.3 -3.4 1.0 -1.3 -0.3 1.6 -1.2 0.4


Other investment 0.8 -0.4 0.4 1.4 1.4 2.8 0.1 1.3 1.4

Errors and omissions -0.6 -0.7 -0.7


Notes: A positive (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A negative (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow. (a) The figures in brackets in “Other investment” of monetary authorities and of other monetary fi-

nancial institutions are adjusted for temporary end-of-year transactions between those sectors, which were reverted in the first days of the following year.

186

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Table A.7.2


End-of-period position

EUR millions

1999 2000 2001 2002 2003 2004 2005

Transactions Price

changes

Exchange rate

changes

Other

adjustments

End-of-period

position

International investment position -38 245 -47 433 -55 964 -66 218 -74 035 -84 416 -12 873 1 983 410 343 -94 553


-15 655 -13 425 -15 814 -22 398 -20 838 -16 321 -1 582 256 139 504 -17 005


-15 189 -12 629 -13 084 -13 121 -10 731 -12 057 1 586 -203 508 0 -10 166

Financial derivates 640 575 845 479 -28 -613 172 378 0 0 -64

Other investment(c)

-22 077 -37 243 -45 023 -48 057 -52 585 -64 001 -11 619 0 -323 -160 -76 104

Reserve assets 14 035 15 289 17 112 16 879 10 146 8 578 -1 431 1 552 86 0 8 785


Monetary authorities 18 806 15 352 16 490 15 693 19 718 12 052 -3 973 1 535 72 -28 9 658

Portfolio investment 6 019 6 621 6 189 5 690 10 809 9 828 1 013 -19 0 0 10 822

Financial derivates 0 0 -2 7 4 0 -2 2 0 0 0

Other investment -1 248 -6 559 -6 810 -6 884 -1 242 -6 354 -3 552 0 -14 -28 -9 949

Reserve assets 14 035 15 289 17 112 16 879 10 146 8 578 -1 431 1 552 86 0 8 785

General government -27 237 -30 015 -31 476 -36 827 -41 480 -49 113 -9 187 252 290 7 -57 751

Direct investment 0 0 0 0 0 0 0 0 0 0 0

Portfolio investment -25 571 -28 378 -31 713 -36 514 -41 065 -47 599 -9 902 327 -8 0 -57 182

Financial derivates 372 353 429 79 234 -262 29 -75 0 0 -309

Other investment -2 038 -1 990 -192 -392 -649 -1 252 686 0 298 7 -260

Other monetary financial institutions -20 009 -35 749 -52 644 -59 010 -63 782 -56 716 2 675 484 -944 202 -54 299

Direct investment 32 -1 721 -1 543 -2 255 -2 802 478 409 133 27 101 1 147

Portfolio investment -2 149 -4 229 -6 500 -3 940 1 255 7 224 8 831 -187 -51 0 15 817

Financial derivates 267 221 416 393 -266 -342 110 538 0 0 306

Other investment -18 160 -30 019 -45 018 -53 208 -61 969 -64 076 -6 675 0 -920 101 -71 570

Non-monetary financial institutions 14 556 19 747 24 921 26 445 21 074 19 940 1 348 676 374 158 22 496

Direct investment -2 578 -3 603 -4 119 -3 250 -2 001 -3 736 -712 -49 0 158 -4 339

Portfolio investment 16 748 23 148 27 449 28 999 22 766 23 399 2 270 598 306 0 26 574

Financial derivates 0 1 1 0 0 -9 -180 127 0 0 -62

Other investment 385 201 1 590 697 308 285 -30 0 68 0 323

Non-financial corporations and households -24 361 -16 768 -13 255 -12 520 -9 565 -10 578 -3 737 -965 618 5 -14 657

Direct investment -13 109 -8 100 -10 152 -16 893 -16 035 -13 063 -1 279 172 112 245 -13 813

Portfolio investment -10 235 -9 791 -8 510 -7 356 -4 496 -4 910 -626 -922 261 0 -6 197

Financial derivates 0 0 1 0 0 0 215 -214 0 0 1

Other investment -1 017 1 124 5 407 11 730 10 966 7 395 -2 047 0 245 -240 5 352


Notes: (a) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from Direct Investment Surveys. (b) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from

the “Survey on stocks of foreign securities held by residents”. (c) Includes, in some components, quarterly estimates by Banco de Portugal, based on the accumulation of monthly flows.

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Table A.7.3



1999 2000 2001 2002 2003 2004 2005

International investment position -33.5 -38.8 -43.3 -48.9 -53.7 -59.0 -64.3


-13.7 -11.0 -12.2 -16.5 -15.1 -11.4 -11.6


-13.3 -10.3 -10.1 -9.7 -7.8 -8.4 -6.9

Financial derivates 0.6 0.5 0.7 0.4 0.0 -0.4 0.0

Other investment(c)

-19.3 -30.5 -34.8 -35.5 -38.1 -44.7 -51.8

Reserve assets 12.3 12.5 13.2 12.5 7.4 6.0 6.0


Monetary authorities(d)

16.5 12.6 12.8 11.6 14.3 (8.4) 8.4 (6.1) 6.6 (5.8)

Portfolio investment 5.3 5.4 4.8 4.2 7.8 6.9 7.4

Financial derivates 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other investment -1.1 -5.4 -5.3 -5.1 -0.9 (-6.8) -4.4 (-6.8) -6.8 (-7.5)

Reserve assets 12.3 12.5 13.2 12.5 7.4 6.0 6.0

General government -23.9 -24.5 -24.3 -27.2 -30.1 -34.3 -39.3

Direct investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0


Financial derivates 0.3 0.3 0.3 0.1 0.2 -0.2 -0.2

Other investment -1.8 -1.6 -0.1 -0.3 -0.5 -0.9 -0.2

Other monetary financial institutions(d)

-17.5 -29.2 -40.7 -43.6 -46.2 (-40.4) -39.7 (-37.3) -36.9 (-36.2)

Direct investment 0.0 -1.4 -1.2 -1.7 -2.0 0.3 0.8

Portfolio investment -1.9 -3.5 -5.0 -2.9 0.9 5.1 10.8

Financial derivates 0.2 0.2 0.3 0.3 -0.2 -0.2 0.2

Other investment -15.9 -24.6 -34.8 -39.3 -44.9 (-39.1) -44.8 (-42.4) -48.7 (-47.9)

Non-monetary financial institutions 12.7 16.2 19.3 19.5 15.3 13.9 15.3

Direct investment -2.3 -2.9 -3.2 -2.4 -1.5 -2.6 -3.0

Portfolio investment 14.7 18.9 21.2 21.4 16.5 16.4 18.1


Other investment 0.3 0.2 1.2 0.5 0.2 0.2 0.2

Non-financial corporations and households -21.3 -13.7 -10.3 -9.2 -6.9 -7.4 -10.0

Direct investment -11.5 -6.6 -7.9 -12.5 -11.6 -9.1 -9.4



Other investment -0.9 0.9 4.2 8.7 8.0 5.2 3.6

Memo:

Shares and direct investment 25.8 22.6 20.8 22.6 21.9 19.0 20.2

Debt(e)

7.7 16.2 22.5 26.2 31.8 40.0 44.1


Notes: (a) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from Direct Investment Surveys. (b) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from

the “Survey on stocks of foreign securities held by residents”. (c) Includes, in some components, quarterly estimates by Banco de Portugal, based on the accumulation of monthly flows. (d) The figures in brackets in “Other investment” of monetary authorities and of other monetary financial institutions are adjusted for temporary

end-of-year transactions between those sectors, which were reverted in the first days of the following year. (e) Includes securities, other investment, financial derivatives and other financial instruments not included under “Equity shares and direct investment”.

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Table A.7.4

NET ISSUANCE OF SECURITIES IN THE EXTERNAL AND INTERNAL MARKETS BY INSTITUTIONAL SECTOR

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Net issuance by residents

Debt securities 5 083 2 187 4 806 6 483 6 020 10 620 9 480 6 473 8 078 9 475

General government 2 488 254 1 667 2 896 1 920 5 471 6 583 4 414 6 580 11 468

Monetary financial institutions 563 1 313 1 207 853 3 768 2 777 44 1 830 -1 475 -10 420

Non-monetary financial institutions 792 -105 526 245 -153 39 -198 1 588 1 352 2 839

of which:

Asset-backed bonds 0 0 0 0 0 0 0 1 765 178 1 757

Non-financial corporations 1 240 724 1 406 2 489 485 2 333 3 050 -1 358 1 621 5 588

Shares and other equity(a)

3 095 3 314 6 609 7 910 14 095 10 426 8 532 13 671 9 937 6 416

Monetary financial institutions 711 351 2 239 513 3 285 800 459 1 158 747 620

Non-monetary financial institutions 369 61 91 396 1 661 2 023 3 866 8 828 5 447 5 608

of which:

Securitisation units 0 0 0 0 0 999 2 595 8 802 4 408 3 988

Non-financial corporations 2 014 2 902 4 279 7 001 9 149 7 604 4 207 3 685 3 743 187

Investment fund units - - - - - 1 037 1 307 2 242 1 958 3 997

of which:

Money market fund units - - - - - 54 501 385 5 15

Mutual fund units - - - - - 304 36 1 197 1 016 3 024

Real estate fund units - - - - - 678 770 660 938 958

Public sale offerings

Privatisation 491 1 985 2 189 572 1 057 122 - 8 - 5

Other 24 38 495 120 195 1 2 47 16

Memo:

Net issuance of debt securities by residents in the external market(b)

1 296 3 132 4 1 746 202 3 339 -2 405 -1 655 -1 632 -5 647

Issuance of shares by incorporation of reserves(c)

164 3 213 711 617 1 864 761 448 133 82 148

Net issuance abroad by non-resident entities that are branches and

subsidiaries of resident entities:

Financial institutions - - - 3 889 6 936 6 625 6 803 7 649 7 290 6 148

Non-financial institutions - - - 1 509 106 2 825 910 445 91 2 200

Sources: CMVM and Banco de Portugal.

Notes: (a) Excluding investment fund units. (b) Included in “Debt securities”. (c) Included in “Shares and other equity”.

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Table A.7.5

NET ISSUANCE OF SECURITIES BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF INSTRUMENT

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Debt securities 5 082 2 187 4 806 6 483 6 020 10 620 9 480 6 474 8 078 9 475

Government securities 2 488 254 1667 2896 1920 5 471 6583 4 414 6 580 11 468

Commercial paper, Treasury bills and other short-term securities (excluding CEDICs)(a)

-228 -1387 -3 598 -1 050 -351 1 720 -1 937 3 810 6 094 2 232

CEDICs 0 0 0 0 382 181 860 130 825 -338

Fixed-rate Treasury bonds 3 754 7 061 5 900 7 465 2 489 5 851 9 422 1 356 442 9 651

Variable-rate Treasury bonds -1 039 -5 420 -635 -3 518 -600 -2 280 -1 778 -989 -658 -102

Other government securities 0 0 0 0 0 0 16 107 -123 25

Commercial paper and other short-term securities (except general government)(b)

962 182 897 1 767 1 171 1 747 2 904 -924 1 701 2 625

Classical bonds (excluding bonds issued by the general government and asset-backed bonds) 968 1699 178 -1152 294 2155 662 350 193 -2291

Cash certificates 1 896 1852 2 660 3 080 2 993 582 -230 2 157 906 -3 037

Convertible bonds -2 -22 0 509 0 975 700 -168 -500 -700

Warrants 116 0 96 71 0 -37 -9 -139 -66 -15

Asset-backed bonds 0 0 0 0 0 0 0 1765 178 1757

Participation bonds -14 -139 -14 -7 -16 -2 -42 0 4 -87

Other securities -1 331 -1 638 -678 -681 -342 -271 -1 088 -981 -917 -245

Shares and other equity

Shares 3 095 3 314 6 609 7 910 14 095 9 427 5 937 4 869 5 529 2 428

Listed companies 681 573 2 655 1 524 3 967 2 501 1012 963 943 662

Non-listed companies 2 414 2 741 3 955 6 387 10 128 6 927 4 925 3 906 4 586 1 767

Investment fund units - - - - - 1 037 1307 2242 1958 3997

Securitisation units 0 0 0 0 0 999 2 595 8 802 4 408 3 988


Notes: (a) CEDICs - Certificados Especiais de Dívida de Curto Prazo, short-term special debt certificates issued by the Portuguese State to allocate liquidity surpluses of general government entities. (b) Including commercial paper issued with maturity over 1 year.

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Table A.7.6

GROSS ISSUANCE OF MEDIUM- AND LONG-TERM BONDS BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF RATE

(A) General government

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed rate 5085 8513 8775 10063 7703 8634 13123 7585 6716 16778

Indexed rate 3703 1035 361 40 0 134 30 157 0 0

Interest rate 3703 959 361 25 0 134 30 157 0 0

Euribor or Lisbor 2793 734 85 25 0 134 30 157 0 0

Other 910 225 276 0 0 0 0 0 0 0

Stock price quotations and indices 0 0 0 0 0 0 0 0 0 0

PSI 20 0 0 0 0 0 0 0 0 0 0

Other 0 0 0 0 0 0 0 0 0 0

Other benchmarks 0 76 0 15 0 0 0 0 0 0

Total 8788 9548 9135 10103 7703 8768 13153 7742 6716 16778

Sources: Euronext Lisboa, IGCP, financial intermediaries and major national newspapers (pursuant to Decree-Law No. 142-A/91 of 10 April).

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Table A.7.6


(B) Financial institutions

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed rate 397 130 194 1 151 1 418 2 190 3 569 2 886 3 229 2 163

Indexed rate 2 377 3 626 3 268 3 203 4 816 5 141 3 164 6 265 4 017 5 283

Interest rate 2 033 2 628 2 037 1 922 3 191 3 859 2 107 5 276 3 326 3 516

Euribor or Lisbor 1 935 2 579 1 994 1 922 2 773 2 479 1 949 5 211 3 315 3 472

Other 98 50 43 0 417 1 380 158 65 10 44

Stock price quotations and indices 67 316 831 59 646 1 277 1 018 687 579 1 767

PSI 20 67 177 254 59 8 20 0 0 0 0

Other 0 140 577 0 639 1 257 1 018 687 579 1 767

Other benchmarks 277 681 400 1 222 979 5 39 302 113 0

Total 2 773 3 756 3 462 4 354 6 234 7 331 6 732 9 151 7 246 7 445

Sources: Euronext Lisboa, IGCP, financial intermediaries and major national newspapers (pursuant to Decree-Law No. 142-A/91 of 10 April).

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Table A.7.6


(C) Non-financial institutions

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed rate 185 255 167 1 512 0 1 574 16 12 214 615

Indexed rate 1 452 1 205 1 534 511 124 67 372 1 107 873 2 016

Interest rate 1 447 1 205 1 534 510 124 67 372 1 107 873 2 016

Euribor or Lisbor 1 397 960 1 344 510 124 67 372 1 107 873 2 016

Other 50 244 190 0 0 0 0 0 0 0

Stock price quotations and indices 0 0 0 0 0 0 0 0 0 0

PSI 20 0 0 0 0 0 0 0 0 0 0

Other 0 0 0 0 0 0 0 0 0 0

Other benchmarks 6 0 0 1 0 0 0 0 0 0

Total 1 637 1 459 1 701 2 022 124 1 641 387 1 119 1 087 2 631

Sources: Euronext Lisboa, IGCP,financial intermediaries and major national newspapers (pursuant to Decree-Law No. 142-A/91 of 10 April).

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Table A.7.7

EURONEXT LISBOA: TURNOVER OF SHARES(a)

1999 2000 2001 2002 2003 2004 2005

PSI-20 Index - end-of-year 11 961 10 404 7 831 5 825 6 747 7 600 8 619

Issuers

Number of listed companies 125 110 101 91 81 79 74

Official quotation market 73 62 57 52 48 45 48

Second market(b)

12 9 8 8 7 7 -

Market without quotations 40 39 36 31 26 27 26

Stock market capitalisation (EUR millions)

Value of listed shares 67 991 64 658 52 940 42 149 46 393 52 215 56 977

Official quotation market 67 314 63 317 52 367 41 755 46 101 51 563 56 742

Second market(b)

245 105 111 153 107 113 -

Market without quotations 433 1 236 462 242 184 539 235

Trading (EUR millions)

Value of traded shares 39 162 67 397 31 393 21 794 19 709 27 754 30 762

Official quotation market 38 150 59 235 30 688 21 655 19 002 27 338 30 352

Second market(b)

5 44 2 32 18 5 -

Market without quotations 176 106 2 5 3 18 9

Special trading sessions 831 8 012 701 102 686 393 401

Sources: CMVM and Euronext Lisboa.

Notes: (a) Data on national issuers only. (b) The second market (regulated market) was discontinued in April 2005. Shares traded on this market were transferred to Eurolist by Euronext Lisboa (previous official quotation market) and to the market without quotations (non-regulated market).

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Table A.7.8

STOCK MARKET CAPITALISATION AS A PERCENTAGE OF GDP

International comparison

Per cent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Euro area(a)

35 48 62 90 88 73 48 54 58 66

Germany 28 40 49 72 67 58 31 40 40 46

Spain 41 53 65 76 88 81 64 77 87 90

France 38 49 65 111 110 91 62 69 70 87

Italy 21 30 45 66 70 49 37 37 43 48

Netherlands(b)

- - - - 161 120 77 79 80 113

United Kingdom 143 161 154 214 185 151 107 121 121 147

Portugal 22 38 53 60 53 41 31 34 37 39

Euronext(c)

- - - - - 97 67 69 71 89

Sources: De Nederlandsche Bank, Eurostat, Euronext and Banco de Portugal.

Notes: (a) Consisted of 11 countries up to 31 December 2000; includes also Greece as from 1 January 2001. (b) Stock market capitalisation figures are those disclosed in the Statistical Bulletin of the De Nederlandsche Bank. (c) Amsterdam, Brussels and Paris up to 2001; the previous and Euronext Lisboa in 2002.

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Table A.7.9

TURNOVER OF BONDS

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Issuers on Euronext Lisboa

Number of bonds issues listed 365 321 352 373 385 364 333 255 207 149

Official quotation market 250 187 166 153 203 224 239 193 165 0

Public debt(a)

93 82 75 64 56 43 42 37 18 19

Miscellaneous 157 105 91 89 147 181 197 156 147 129

Second market(b)

107 132 185 219 182 140 94 62 42 0

Market without quotations 8 2 1 1 0 0 0 0 0 1

Stock market capitalisation on Euronext Lisboa (EUR millions)

Value of outstanding bonds listed 33 479 35 473 42 524 47 461 49 663 55 034 65 102 62 380 53 689 43 596

Official quotation market 31 623 32 712 37 920 42 311 44 480 51 569 62 793 61 275 52 658 0

Public debt(a)

27 931 28 681 33 380 37 544 39 682 46 811 57 074 56 308 48 987 40 591

Miscellaneous 3 692 4 031 4 540 4 767 4 798 4 758 5 719 4 967 3 671 3 005

Second market(b)

1 856 2 761 4 604 5 150 5 182 3 465 2 309 1 105 1 031 0

Trading on Euronext Lisboa (EUR millions)

Regular trading sessions 11 230 11 363 5 839 3 569 2 783 1 626 1 002 1 268 654 531

Official quotation market 9 833 10 852 4 836 2 884 1 907 1 190 574 831 572 531

Public debt(a)

9 397 10 560 4 836 2 552 1 496 742 310 322 198 50

Second market(b)

1 394 509 976 638 876 435 428 436 81 0

Market without quotations 4 1 28 47 0 0 0 0 0 0

Special trading sessions - 74 - 42 0 0 0 0 15 18

Special market for wholesale transactions (MEOG) 51 009 61 008 107 829 154 255 38 993 71 - - - -

Public debt(a)

50 489 60 290 106 889 153 675 38 783 - - - - -

Government debt trading on MEDIP and on EuroMTS (EUR millions)

Special Government debt market (MEDIP)(c)

- - - - 21 658 106 516 111 163 132 055 135 760 146 691

Treasury bonds - - - - 21 658 106 516 111 163 128 245 122 110 133 001

Treasury bills - - - - - - - 3 810 13 650 13 690

European debt market (EuroMTS)(d)

- - - - 6 980 16 968 33 585 22 875 20 448 15 418

Memo:

Total government debt trading 59 887 70 849 111 725 156 227 68 916 124 225 145 058 155 252 156 406 162 159

Sources: CMVM, Euronext Lisboa and IGCP.

Notes: All the figures concern the Euronext Lisboa unless otherwise indicated. (a) Includes other government and similar funds. (b) The second market (regulated market) was discontinued in April 2005. Shares traded on this market were transferred to Eurolist by Euronext Lisboa (previous official quotation market) and to the mar-

ket without quotations (non-regulated market). (c) The MEDIP is a market managed by MTS Portugal for the negotiation of the Portuguese government debt. The Portuguese state is a shareholder of MTS Portugal through the IGCP. (d) The EuroMTS is a pan-European trading platform for government debt.

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Table A.7.10

DERIVATIVES STOCK EXCHANGE

1999 2000 2001 2002 2003 2004 2005

Contracts traded (thousands)

Futures 2 948 5 723 4 497 3 944 837 664 478

PSI 20 870 738 565 346 214 115 64

Other 2 078 4 986 3 932 3 598 623 549 413

Options 100 177 400 28 12 - -

PSI 20 27 27 20 1 0 - -

Other 73 150 380 27 12 - -

Turnover (EUR millions)

Futures 10 339 12 662 7 011 3 270 1 452 1 029 630

PSI 20 9 163 9 007 5 029 2 371 1 275 845 507

Other 1 176 3 655 1 981 899 176 184 122

Options 11 489 431 260 14 9 - -

PSI 20 267 311 176 11 0 - -

Other 11 221 119 83 4 9 - -

Sources: CMVM and Euronext Lisboa.

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Table A.7.11

INSTITUTIONAL INVESTORS’ PORTFOLIO

End-of-period position

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mutual and money market funds

Currency and deposits - 3 148 3 408 3 493 2 288 2 754 2 756 3 028 3 181 3 278

Debt securities - 11 537 13 446 12 993 12 526 13 887 15 174 17 222 17 701 20 108

Resident issuers - 7 984 8 835 6 279 4 601 3 792 3 430 3 225 2 992 3 228

Non-resident issuers - 3 554 4 611 6 714 7 925 10 095 11 745 13 997 14 709 16 879

Shares and other equity - 1 936 2 904 3 524 3 488 2 492 1 518 1 535 1 433 1 446

Resident issuers - 1 751 2 411 2 062 1 376 774 496 589 743 834

Non-resident issuers - 185 493 1 462 2 112 1 718 1 021 946 690 612

Investment fund units - 3 051 3 924 3 583 2 884 1 858 1 067 1 053 1 660 2 727

of which: residents - 2 722 3 475 2 924 2 397 1 478 844 717 1 038 1 039

Other assets - 157 103 253 231 77 74 170 104 253

Total - 19 828 23 785 23 845 21 416 21 068 20 589 23 009 24 079 27 812

Real estate funds

Currency and deposits - - 409 440 447 523 634 590 551 726

Debt securities - - 36 204 10 11 2 0 0 0

Resident issuers - - 36 204 10 11 2 0 0 0

Non-resident issuers - - 0 0 0 0 0 0 0 0


- - 49 76 97 228 121 197 199 151

Resident issuers - - 49 76 97 228 121 197 199 151

Non-resident issuers - - 0 0 0 0 0 0 0 0

Investment fund units - - - - 5 3 5 6 9 31

Real estate - - 2 134 2 417 2 835 3 316 4 062 4 892 6 343 7 434

Other assets - - - - 284 248 453 491 558 679

Total - - - - 3 679 4 329 5 277 6 175 7 660 9 020

Pension funds(b)

Currency and deposits 848 742 726 1 355 1 549 1 549 1 894 1 513 1 249 1 901

Debt securities 5 724 6 210 6 437 6 141 6 426 7 459 7 779 6 586 6 511 7 700


885 1 783 2 790 3 660 3 469 2 971 2 650 3 142 3 264 4 047

Investment fund units 528 844 904 1 076 1 627 1 977 1 864 3 338 3 540 4 126

Real estate 315 346 430 554 695 871 1 365 1 592 1 638 1 547

Other assets 0 0 0 0 0 0 0 0 01 014 -336

Total 8 299 9 925 11 287 12 787 13 766 14 826 15 552 16 171 15 188 18 985

Sources: ISP and Banco de Portugal.

Notes: (a) Excluding investment fund units and equity shares whenever regulatorily classified as real estate related. (b) Data for pension funds concerning 2005 are preliminary.

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Table A.7.12

FLOWS OF FUNDS IN THE PORTUGUESE ECONOMY (to be continued)

Consolidated values in 2004


Non-financial corporations(a)

Financial corporations(b)

General government Households External sector

Investment Resources Investment Resources Investment Resources Investment Resources Investment Resources

Non-financial operations

Current savings 8.6 2.1 -2.2 7.1 7.3

Capital transfers 0.0 0.7 (1.1) 2.5 (0.8) 0.4 1.4 3.5 (1.4) 0.2 1.0 1.6

Gross fixed capital formation 12.6 1.3 3.0 6.0 -

Net acquisitions of financial assets 0.9 0.0 0.1 -1.0 -

Lending/borrowing requirements -4.2 (-3.8) -1.3(0.5) -3.2 (-5.3) 2.9 5.7

Discrepancy 0.0 0.0 0.0 0.0 0.0

Financial operations

Financial saving -4.2 (-3.8 ) -1.3 (0.5 ) -3.2 (-5.3 ) 2.9 5.7

Total 3.8 8.0 17.8 19.1 0.7 3.9 7.8 4.9 17.9 12.1

Monetary gold and SDR - - -0.4 - 0.0 - - - 0.4 -

Currency and deposits 0.8 - 0.9 9.6 -0.1 -0.1 2.5 - 7.0 1.5

Securities other than shares 0.4 1.2 4.6 0.4 -0.1 3.0 1.7 0.0 4.2 6.1

Loans -1.9 1.4 10.3 -0.9 0.1 0.9 0.0 6.9 -1.6 -1.4

Shares and other equity 2.9 2.3 1.9 5.9 -0.1 0.0 1.1 0.0 7.3 4.9

Shares and other equity excluding investment funds 2.9 2.3 1.6 4.9 -0.2 0.0 0.3 0.0 7.1 4.5

Investment fund units 0.0 - 0.3 1.0 0.1 - 0.8 - 0.1 0.4

Insurance technical reserves 0.1 0.6 -0.1 2.2 0.0 0.0 2.7 0.0 0.0 -0.1

Life insurance and pension funds - 0.6 - 2.1 0.0 0.0 2.6 0.0 0.0 0.0

Other reserves 0.1 - -0.1 0.2 0.0 - 0.1 0.0 0.0 -0.1

Other debit and credit 1.5 2.6 0.6 1.9 0.9 0.1 -0.1 -2.0 0.6 1.1

Trade credit 0.7 0.7 0.0 -0.4 0.0 0.0 0.0 0.7 0.6 0.4

Other accounts receivable 0.8 1.9 0.6 2.3 0.9 0.1 -0.1 -2.8 0.0 0.7


Notes: Figures in brackets correspond to the adjusted values of extraordinary budget measures with temporary effects, as described in notes (a) and (b). (a) Transfer of pension funds from publicly-owned non-financial corporations to Caixa Geral de Aposentações, in particular funds from Navegação Aérea de Portugal and

Imprensa Nacional Casa da Moeda, corresponding to around 0.16, 0.12 and 0.10 per cent of GDP, respectively. (b) Transfer of assets from the Caixa Geral de Depósitos to Caixa Geral de Aposentações (1.75 per cent of GDP).

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Table A.7.12

FLOWS OF FUNDS IN THE PORTUGUESE ECONOMY (continued)

Consolidated values in 2005


Non-financial corporations Financial corporations General government Households External sector

Investment Resources Investment Resources Investment Resources Investment Resources Investment Resources

Non-financial operations

Current savings 6.8 2.5 -2.8 6.6 9.3

Capital transfers 0.0 0.9 2.7 1.3 1.3 1.4 0.3 1.9 1.2

Gross fixed capital formation 11.9 1.5 3.1 5.9 -

Net acquisitions of financial assets 0.9 0.0 0.2 -1.0 -

Lending/borrowing requirements -5.1 -0.4 -6.0 3.4 8.1

Discrepancy -0.2 0.0 0.0 0.0 0.2

Financial operations

Financial saving -4.9 -0.4 -6.0 3.4 7.9

Total 3.2 8.2 22.8 23.1 0.3 6.3 10.5 7.1 19.3 11.4

Monetary gold and SDRs - - -0.3 - 0.0 - - - 0.3 -

Currency and deposits 2.6 0.0 3.5 11.2 0.6 0.2 0.5 0.0 6.1 2.0

Securities other than shares -0.2 3.5 9.4 -2.8 0.3 7.3 1.8 0.0 6.2 9.7

Loans 0.7 3.4 8.8 2.4 0.2 -0.1 0.0 7.9 1.8 -2.0

Shares and other equity -0.6 0.4 0.5 5.8 -0.3 0.0 2.3 0.0 5.1 0.7

Shares and other equity excluding investment funds -0.9 0.4 -0.2 3.9 -0.3 0.0 0.3 0.0 5.0 -0.4

Investment fund units 0.3 - 0.7 1.9 0.0 - 1.9 - 0.1 1.1

Insurance technical reserves 0.1 -0.3 0.1 6.2 0.0 0.0 5.8 0.0 0.0 0.1

Life insurance and pension funds - -0.3 - 5.9 - 0.0 5.6 0.0 0.0 0.0

Other reserves 0.1 0.0 0.1 0.3 0.0 0.0 0.2 0.0 0.0 0.1

Other debit and credit 0.6 1.1 0.8 0.5 -0.6 -1.2 0.1 -0.8 -0.4 0.9

Trade credit 0.1 -0.2 0.1 0.1 0.0 0.0 0.2 -0.2 -0.4 0.2

Other accounts receivable 0.5 1.3 0.7 0.4 -0.6 -1.2 0.0 -0.6 0.0 0.7


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Table A.7.13

FINANCIAL TRANSACTIONS OF HOUSEHOLDS

Consolidated values

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Net acquisition of financial assets 9 454 10 420 12 806 15 119 18 623 20 646 13 914 13 039 11 215 15 410


As a percentage of disposable income 14.1 14.6 17.1 18.7 21.4 22.4 14.5 13.3 11.0 14.6

Currency and deposits 5 534 3 525 3 730 7 370 8 392 6 933 2 939 210 3 518 720

Securities other than shares 35 191 2 835 4 237 4 818 6 142 4 967 3 369 2 387 2 673

Loans -353 -935 -90 21 -323 -63 4 -2 4 5

Shares and other equity 1 049 3 424 4 181 2 032 2 452 2 394 2 423 5 669 1 528 3 342

Shares and other equity excluding investment funds -473 214 1 509 1 435 2 502 826 1 325 3 146 372 480

Investment funds 1 522 3 210 2 673 597 -49 1 568 1 098 2 523 1 156 2 862

Insurance technical reserves 3 084 4 401 3 175 4 032 3 531 5 191 4 189 3 101 3 860 8 484

Life insurance and pension funds 2 852 3 984 2 926 3 869 3 180 4 934 4 050 3 040 3 773 8 218

Other reserves 231 417 249 162 352 257 140 61 87 266

Other transactions 106 -187 -1 025 -2 574 -247 49 -608 692 -82 186

Trade credit 140 183 128 34 130 180 -57 -100 56 234

Other transactions excluding trade credit -34 -369 -1 153 -2 607 -377 -131 -551 792 -138 -48

Net incurrence of financial liabilities 6 398 7 819 12 013 14 173 17 139 17 049 9 643 8 408 7 017 10 419



Currency and deposits 0 0 0 0 0 0 0 0 0 0

Securities other than shares 0 15 -3 0 0 0 0 -1 2 -65

Loans 5 806 7 276 10 861 12 910 12 096 9 307 9 565 8 963 9 934 11 588

Shares and other equity 16 18 31 0 0 0 0 0 0 0

Shares and other equity excluding investment funds 16 18 31 0 0 0 0 0 0 0

Investment funds 0 0 0 0 0 0 0 0 0 0

Insurance technical reserves 0 0 0 0 0 0 0 0 0 0

Life insurance and pension funds 0 0 0 0 0 0 0 0 0 0

Other reserves 0 0 0 0 0 0 0 0 0 0

Other transactions 576 510 1 124 1 263 5 043 7 742 78 -554 -2 919 -1 103

Trade credit 1 118 168 703 1 000 1 947 498 -356 -100 1 068 -285

Other transactions excluding trade credit -543 342 421 263 3 096 7 244 434 -454 -3 987 -818

Financial saving(a)3 056 2 601 793 945 1 484 3 596 4 271 4 631 4 198 4 991



Financial saving - adjusted figures(b)

4 800

As a percentage of GDP 3.5

As a percentage of disposable income 4.9


Notes: (a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense, it is the difference between resources (income and transfers) and

allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction of the effect of the sale of tax credits by general government.

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Table A.7.14

FINANCIAL ASSETS AND LIABILITIES OF HOUSEHOLDS

Consolidated values; end-of-period

EUR millions

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Financial assets 154 101 162 306 174 966 187 630 210 175 229 341 248 773 253 845 272 540 286 750 308 138

As a percentage of GDP 181.0 179.3 178.7 176.3 184.1 187.6 192.4 187.4 197.6 200.5 209.6

As a percentage of disposable income 242.0 242.7 245.8 250.4 260.6 263.6 270.5 265.3 277.9 280.5 291.7

Currency and deposits 75 373 80 907 84 548 88 224 95 623 104 147 111 216 112 902 113 093 116 363 117 508

Securities other than shares 1 351 1 349 1 609 6 396 10 738 13 981 19 204 23 985 26 534 28 616 30 491

Loans 1 735 1 382 438 346 363 55 12 7 7 6 13

Shares and other equity 56 327 57 598 62 545 63 746 70 418 73 520 76 534 71 820 83 779 90 368 98 674

Shares and other equity excluding investment fund units 46 872 46 546 47 659 45 994 52 002 53 967 55 777 50 788 59 734 64 556 69 178

Investment fund units 9 454 11 051 14 887 17 752 18 415 19 553 20 757 21 032 24 045 25 812 29 496

Insurance technical reserves 15 938 19 005 23 475 26 442 30 921 35 174 39 293 42 696 46 000 48 424 58 294

Life insurance and pension funds 14 084 16 920 20 973 24 143 28 460 32 359 36 222 39 485 42 727 45 064 54 668

Other reserves 1 854 2 085 2 503 2 299 2 461 2 815 3 072 3 211 3 273 3 360 3 626

Other debits and credits 3 378 2 066 2 350 2 476 2 112 2 464 2 513 2 434 3 126 2 972 3 157

Trade credits 1 513 1 653 1 836 2 006 2 040 2 171 2 351 2 294 2 194 2 250 2 484

Other accounts receivable 1 866 413 514 470 73 293 162 140 932 722 673

Financial liabilities 34 740 39 519 48 324 59 359 74 736 90 665 98 611 107 121 118 181 127 470 138 853



Currency and deposits 0 0 0 0 0 0 0 0 0 0 0

Securities other than shares 0 0 15 0 0 1 1 1 -1 1 -64

Loans 22 915 28 651 36 636 47 504 61 615 73 790 82 757 92 494 101 689 112 192 123 751

Shares and other equity 0 0 0 1 0 0 0 0 0 0 0

Shares and other equity excluding investment fund units 0 0 0 1 0 0 0 0 0 0 0

Investment fund units 0 0 0 0 0 0 0 0 0 0 0

Insurance technical reserves 0 0 0 0 0 0 0 0 0 0 0

Life insurance and pension funds 0 0 0 0 0 0 0 0 0 0 0

Other reserves 0 0 0 0 0 0 0 0 0 0 0


Trade credits 8 268 9 386 9 555 9 623 10 622 12 670 13 168 12 812 12 712 13 782 13 497

Other accounts receivable 3 557 1 482 2 118 2 231 2 498 4 205 2 685 1 814 3 781 1 495 1 669

Net financial assets 119 361 122 787 126 643 128 271 135 438 138 675 150 162 146 724 154 359 159 281 169 284




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Table A.7.15

FINANCIAL TRANSACTIONS OF NON-FINANCIAL CORPORATIONS

Consolidated values

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005



Currency and deposits 1 958 1 767 3 607 1 711 2 884 1 597 433 3 376 1 080 3 893

Securities other than shares 778 159 1 285 925 1 283 2 108 357 1 218 643 -226

Loans 52 138 491 77 986 1 467 5 204 17 -2 709 1 014

Shares and other equity 1 851 3 167 6 288 6 039 6 903 6 809 -2 963 3 002 4 195 -955

Shares and other equity excluding investment funds 1 656 2 795 6 013 6 843 7 118 6 663 -3 056 2 852 4 158 -1 338

Investment funds 195 372 275 -804 -215 146 93 150 37 383



Other reserves 99 195 87 102 201 137 66 143 124 142

Other transactions 3 605 5 283 617 3 972 1 235 -54 -366 386 2 175 905

Trade credit 1 510 700 867 1 597 2 822 418 757 142 997 116

Other transactions excluding trade credit 2 095 4 583 -250 2 375 -1 587 -472 -1 123 244 1 178 789




Securities other than shares 1 167 732 1 390 2 178 -73 3 261 2 421 -774 1 718 5 192

Loans 2 446 7 212 8 847 10 887 15 734 15 927 6 383 7 633 1 974 4 942

Shares and other equity 2 596 3 758 4 914 5 043 6 696 7 225 2 859 8 114 3 321 648

Shares and other equity excluding investment funds 2 596 3 758 4 914 5 043 6 696 7 225 2 859 8 114 3 321 648


Insurance technical reserves 165 688 -419 -31 135 374 -384 1 373 823 -411

Life insurance and pension funds 165 688 -419 -31 135 374 -384 1 373 823 -411

Other reserves 0 0 0 0 0 0 0 0 0 0

Other transactions 1 934 987 669 347 1 187 -6 030 -1 080 -2 106 3 663 1 663

Trade credit 675 767 701 1 133 1 066 -152 57 132 986 -221

Other transactions excluding trade credit 1 259 220 -32 -786 121 -5 878 -1 137 -2 237 2 677 1 884

Financial saving(a)

35 -2 669 -3 025 -5 599 -10 187 -8 692 -7 468 -6 097 -5 992 -7 261

As a percentage of GDP 0.0 -2.7 -2.8 -4.9 -8.3 -6.7 -5.5 -4.4 -4.2 -4.9


-3 206 -5 445

As a percentage of GDP -2.3 -3.8



allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction, in 2003, of the effect of the sale of tax credits by general government, in 2003, and of transfers of pension funds from public undertakings to Caixa Geral de Aposentações, namely the transfer from the Post Office

(€1300.0 million) in 2003 and the transfers from Navegação Aérea de Portugal (€ 235.7 million), Aeroportos de Portugal (€173.6 million) and Imprensa Nacional Casa da Moeda (€137.8 million) in 2004.

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Table A.7.16

FINANCIAL ASSETS AND LIABILITIES OF NON-FINANCIAL CORPORATIONS


EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Financial assets 54 240 64 343 65 074 69 308 82 956 89 355 88 302 103 030 109 075 115 594


Currency and deposits 20 020 23 642 29 292 29 056 30 741 32 189 31 987 35 548 36 581 40 621


Loans 257 410 1 197 1 033 1 954 3 082 8 251 8 758 6 890 8 056


Shares and other equity excluding investment fund units 12 430 16 045 7 310 12 762 22 175 23 634 15 433 26 412 31 392 32 160

Investment fund units 2 222 2 695 3 005 2 201 715 848 907 1 086 1 150 1 569

Insurance technical reserves 844 1 039 1 637 1 738 1 943 2 080 2 146 2 289 2 413 2 555


Other reserves 844 1 039 1 637 1 738 1 943 2 080 2 146 2 289 2 413 2 555

Other debits and credits 17 725 19 610 20 484 19 266 21 133 21 651 22 452 21 790 22 790 22 858

Trade credits 14 980 15 680 15 733 17 330 20 131 20 549 21 306 21 465 22 462 22 578

Other accounts receivable 2 745 3 930 4 751 1 936 1 002 1 102 1 146 325 328 280

Financial liabilities 151 197 169 293 170 130 193 000 213 171 238 475 240 521 264 050 276 651 289 904



Securities other than shares 7 255 7 913 9 164 11 358 10 328 13 575 16 039 14 970 16 617 21 853

Loans 40 426 45 490 57 216 66 763 81 219 97 975 102 988 111 350 111 943 116 523



Investment fund units 0 0 0 0 0 0 0 0 0 0



Other reserves 0 0 0 0 0 0 0 0 0 0


Trade credits 7 180 7 948 7 853 8 986 10 032 9 880 9 937 10 081 11 067 10 846

Other accounts receivable 10 638 11 810 5 309 5 779 3 342 7 551 8 584 4 648 3 725 1 853

Net financial assets -96 958 -104 950 -105 056 -123 693 -130 215 -149 120 -152 219 -161 020 -167 577 -174 310

As a percentage of GDP -107.1 -107.2 -98.7 -108.3 -106.5 -115.3 -112.4 -116.7 -117.2 -118.6


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Table A.7.17

FINANCIAL TRANSACTIONS OF THE GENERAL GOVERNMENT

Consolidated values

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Net acquisition of financial assets -860 -2 640 -1 612 193 -16 350 2 976 -185 985 456

As a percentage of GDP -1.0 -2.7 -1.5 0.2 0.0 0.3 2.2 -0.1 0.7 0.3

Currency and deposits -218 368 718 721 -678 -1 827 1 574 -1 290 -208 925

Securities other than shares 144 -108 142 49 82 501 -61 199 -125 510

Loans 90 97 193 129 164 325 281 423 121 277

Shares and other equity -1 683 -3 680 -2 429 -1 095 -273 -109 803 386 -116 -426

Shares and other equity excluding investment funds -1 676 -3 687 -2 434 -1 168 -296 -128 802 372 -244 -474

Investment funds -6 7 5 74 23 19 1 15 128 47



Other reserves 1 2 1 0 1 1 0 1 1 1

Other transactions 805 681 -237 389 688 1 459 378 95 1 312 -830

Trade credit 0 0 0 0 1 0 0 0 0 0

Other transactions excluding trade credit 805 681 -237 388 687 1 459 378 95 1 312 -830

Net incurrence of financial liabilities 3 255 685 1 588 3 318 3 532 5 938 6 889 3 879 5 583 9 253


Currency and deposits 1 179 630 252 440 1 136 1 117 1 047 697 -165 362


Loans -581 -715 154 348 -43 765 562 143 1 244 -156


Shares and other equity excluding investment funds 0 0 0 0 0 0 0 0 0 0




Other reserves 0 0 0 0 0 0 0 0 0 0

Other transactions -43 242 557 603 937 -1 380 -475 -31 175 -1 714

Trade credit 23 -13 8 -1 -6 -2 -14 -1 0 0

Other transactions excluding trade credit -66 254 550 605 943 -1 377 -461 -30 175 -1 714

Financial saving(a)

-4 115 -3 325 -3 201 -3 125 -3 548 -5 587 -3 913 -4 064 -4 598 -8 798



-7 124 -7 649

As a percentage of GDP -5.2 -5.3



allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction, in 2003, of the effect of the sale of tax credits by general government, in 2003 and 2004,of transfers of pension funds from public undertakings to Caixa Geral de Aposentações, namely the transfer from the Post Office

(€1300.0 million) in 2003, transfers of pension funds of Caixa Geral de Depósitos (€2504.4 million) and the transfers from Navegação Aérea de Portugal (€ 235.7 million), Aeroportos de Portugal (€173.6 million) and Imprensa Nacional Casa da Moeda (€137.8 million) in 2004.

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Table A.7.18

FINANCIAL ASSETS AND LIABILITIES OF THE GENERAL GOVERNMENT


EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Financial assets 37 248 36 603 34 018 35 819 37 011 40 246 41 244 39 866 38 936 41 743



Securities other than shares 323 218 410 821 1 084 1 991 1 927 2 178 1 577 2 051

Loans 187 295 498 628 793 2 666 2 700 2 924 2 991 3 397






Other reserves 6 7 8 9 10 10 11 11 12 13


Trade credits 0 0 0 0 0 0 0 0 0 0


Financial liabilities 61 947 63 254 69 039 69 569 73 561 79 667 88 087 91 332 97 895 107 335




Loans 4 310 3 677 3 673 4 298 4 619 5 389 5 793 6 008 7 251 6 928


Shares and other equity excluding investment fund units 0 0 0 0 0 0 0 0 0 0




Other reserves 0 0 0 0 0 0 0 0 0 0


Trade credits 31 19 27 25 20 17 3 3 0 0


Net financial assets -24 699 -26 651 -35 021 -33 750 -36 550 -39 421 -46 843 -51 466 -58 959 -65 591



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Table A.7.19

GENERAL GOVERNMENT DEBT BY INSTRUMENTS AND BY HOLDING SECTORS

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Classification by instruments


of which: Savings certificates 7 340 7 699 7 681 8 014 8 921 9 639 10 171 10 293 10 214 10 394

Short-term securities 7 173 5 547 1 941 864 486 2 226 286 3 804 9 583 12 110

Bonds 33 572 36 692 40 917 44 678 46 961 50 662 58 120 57 587 55 984 64 011

of which: Treasury bonds - fixed rate 13 786 19 009 22 449 31 672 33 677 40 142 49 604 51 115 51 472 60 556

Treasury bonds - variable rate 5 949 6 546 6 456 4 394 3 231 2 640 1 324 337 0 0

Short-term loans 443 299 301 413 461 681 337 454 1 456 933

Medium- and long-term loans 5 488 4 463 4 333 4 340 4 517 4 771 5 834 5 810 5 954 6 002

Total 54 259 54 964 55 489 58 657 61 729 68 364 75 211 78 433 83 781 94 071


Memo:

General government deposits 7 107 7 476 8 696 8 937 8 260 6 453 8 026 6 666 6 483 7 406

Classification by holding sectors

Domestic sectors 41 771 38 888 37 164 33 619 33 745 36 948 39 442 38 349 37 590 39 080

Banco de Portugal 965 794 177 373 15 22 29 24 28 32

Other monetary financial institutions 19 322 15 099 11 110 7 763 7 789 8 289 7 301 7 214 7 745 8 337

Other financial institutions 9 740 11 380 11 624 9 703 7 822 6 306 5 850 5 328 4 076 3 264

Other residents 11 744 11 615 14 252 15 781 18 120 22 330 26 263 25 783 25 742 27 447

Non-residents 12 488 16 076 18 325 25 038 27 984 31 416 35 768 40 084 46 190 54 991

Total 54 259 54 964 55 489 58 657 61 729 68 364 75 211 78 433 83 781 94 071


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Table A.7.20

FINANCIAL TRANSACTIONS OF THE FINANCIAL SECTOR

Consolidated values

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005



Monetary gold and SDRs 16 17 1 016 -221 9 13 -145 -769 -584 -507

Currency and deposits -1 859 5 525 -2 023 -1 874 4 348 -984 1 740 7 941 1 233 5 215

Securities other than shares 6 861 1 098 2 974 -2 709 525 4 029 3 811 7 904 6 586 13 844

Loans 10 902 15 208 21 939 26 648 29 225 25 106 16 105 13 691 14 795 12 921


Shares and other equity excluding investment funds 1 745 2 435 2 051 2 692 2 989 3 815 1 404 1 567 2 315 -284

Investment funds 557 71 -158 597 -4 518 246 -94 470 967

Insurance technical reserves 49 129 55 13 26 79 -7 168 -213 123


Other reserves 49 129 55 13 26 79 -7 168 -213 123

Other transactions -474 -1 312 3 011 1 522 5 149 559 -624 -887 872 1 184

Trade credit -63 28 8 90 -1 44 -62 15 58 161

Other transactions excluding trade credit -410 -1 340 3 003 1 432 5 151 515 -562 -901 815 1 023




Securities other than shares 1 268 -143 811 2 333 3 924 5 396 772 1 894 639 -4 143

Loans 305 18 1 307 2 494 2 940 1 519 6 324 6 357 -1 312 3 489


Shares and other equity excluding investment funds 702 -478 1 846 1 533 3 834 1 987 4 105 8 189 6 994 5 713

Investment funds 1 518 3 525 2 986 -95 -337 1 494 1 124 2 707 1 418 2 822



Other reserves 340 629 348 273 571 402 210 213 219 423

Other transactions 155 1 659 282 496 -118 1 842 190 1 876 2 716 680

Trade credit 143 -136 62 59 -80 154 419 -89 -580 119

Other transactions excluding trade credit 12 1 795 220 437 -38 1 688 -229 1 965 3 296 561

Financial saving(a)-79 640 924 528 1 138 -334 -1 178 148 -1 827 -554

As a percentage of GDP -0.1 0.7 0.9 0.5 0.9 -0.3 -0.9 0.1 -1.3 -0.4


677



Notes:(a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense it is the difference between resources (income and transfers) and al-

locations (service and good expenditures and transfers). (b) The adjusted figures result from the correction of the effect of transfer of assets from public undertakings to Caixa Geral de Aposentações, namely the pension fund of Caixa Geral de Depósitos (€2504.4 million).

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Table A.7.21

FINANCIAL TRANSACTIONS OF THE SUB-SECTORS OF THE FINANCIAL SECTOR (to be continued)

Consolidated values

EUR millions

Central bank OMFIs OFIFA Insurance corporations and

pensions funds

2004 2005 2004 2005 2004 2005 2004 2005

Net acquisition of financial assets -1 102 2 516 12 027 16 291 9 326 12 962 1 417 9 950

As a percentage of GDP -0.8 1.7 8.4 11.1 6.5 8.8 1.0 6.8

Monetary gold and SDRs - 584 - 507 0 0 0 0 0 0

Currency and deposits 1 307 2 343 -5 447 3 309 840 2 334 - 28 730

Currency 4 4 - 193 - 104 0 1 0 0

Transferable deposits 865 517 -5 564 -1 409 394 1 318 - 456 280

Other deposits 437 1 822 309 4 821 446 1 015 427 451

Securities other than shares -1 816 662 5 240 5 066 167 1 786 2 701 6 242

Securities other than shares and financial derivatives -1 791 654 5 115 5 184 118 1 734 2 699 6 242

Short-term -2 479 2 702 1 701 1 497 - 207 339 638 23

Medium and long-term 688 -2 048 3 413 3 686 325 1 395 2 060 6 219

Financial derivates - 26 8 125 - 118 49 52 2 0

Loans - 12 9 9 850 9 217 6 175 7 423 20 - 5

Short-term - 13 6 467 273 884 495 6 - 4

Medium and long-term 1 3 9 383 8 944 5 292 6 928 14 - 1

Shares and other equity 0 0 1 144 441 1 736 953 - 249 421

Shares and other equity excluding investment funds 0 0 786 - 97 1 572 630 - 505 - 228

Investment funds 0 0 358 537 163 323 256 650

Insurance technical reserves 0 0 1 2 0 1 - 213 123

Life insurance and pension funds 0 0 0 0 0 0 0 0

Other reserves 0 0 1 2 0 1 - 213 123

Other transactions 4 9 1 240 -1 742 407 466 - 813 2 438

Trade credit 0 0 0 0 58 161 0 0

Other transactions excluding trade credit 4 9 1 240 -1 742 349 305 - 813 2 438

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Table A.7.21

FINANCIAL TRANSACTIONS OF THE SUB-SECTORS OF THE FINANCIAL SECTOR (continued)

Consolidated values

EUR millions

Central bank OMFIs OFIFA Insurance corporations and

pension funds

2004 2005 2004 2005 2004 2005 2004 2005

Net incurrence of financial liabilities -1 025 2 581 12 858 16 346 10 184 13 320 1 479 10 026

As a percentage of GDP -0.7 1.8 9.0 11.1 7.1 9.1 1.0 6.8

Monetary gold and SDRs 0 0 0 0 0 0 0 0

SDRs 0 0 0 0 0 0 0 0

Currency and deposits 1 057 2 606 8 061 17 298 0 0 0 0

Currency - 371 22 0 0 0 0 0 0

Transferable deposits 1 805 2 645 -2 683 7 119 0 0 0 0

Other deposits - 377 - 61 10 744 10 179 0 0 0 0

Securities other than shares -1 054 0 135 -6 868 1 216 2 756 46 - 120

Securities other than shares and financial derivatives -1 054 0 135 -6 868 1 211 2 764 0 0

Short-term 0 0 - 551 - 925 242 - 198 0 0

Medium and long-term -1 054 0 686 -5 943 969 2 962 0 0

Financial derivates 0 0 0 0 5 - 8 46 - 120

Loans - 943 - 46 - 592 6 218 1 443 1 169 19 - 129

Short-term 0 0 0 0 1 219 - 212 19 - 71

Medium and long-term - 943 - 46 - 592 6 218 224 1 381 0 - 58

Shares and other equity 0 0 1 431 598 6 658 8 954 168 115

Shares and other equity excluding investment funds 0 0 1 426 580 4 969 5 606 168 115


Insurance technical reserves 0 0 2 546 - 238 - 187 - 2 811 9 294

Life insurance and pension funds 0 0 2 546 - 238 - 180 - 2 584 8 869

Other reserves 0 0 0 0 - 7 0 227 425

Life insurance and pension funds - 85 21 1 278 - 663 1 054 443 435 866

Trade credit 0 0 0 0 5 80 - 585 39

Other transactions excluding trade credit - 85 21 1 278 - 663 1 048 363 1 020 827

Financial saving(a)

- 76 - 65 - 830 - 55 - 858 - 358 - 62 - 76

As a percentage of GDP -0.1 0.0 -0.6 0.0 -0.6 -0.2 0.0 -0.1


1 674



Notes:(a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense it is the difference between resources (income and transfers) and al-

locations (service and good expenditures and transfers). (b) The adjusted figures result from the correction of the effect of transfer of assets from public undertakings to Caixa Geral de Aposentações, namely the pension fund of Caixa Geral de Depósitos (€2504.4 million).

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Table A.7.22

FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS


EUR millions

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Financial assets 151 513 166 311 202 542 231 878 262 906 308 357 340 825 357 893 388 509 415 227 455 812


Monetary gold and SDRs 4 675 4 714 4 378 5 078 5 691 5 773 6 215 6 291 5 565 4 855 5 924



Loans 56 912 66 498 86 707 99 901 126 910 155 298 180 792 196 082 210 504 223 715 236 598



Investment fund units 959 1 205 1 345 1 190 1 548 1 730 2 266 2 434 2 270 2 716 3 731

Insurance technical reserves 286 334 463 518 531 557 636 629 797 584 707

Life insurance and pension funds 0 0 0 0 0 0 0 0 0 0 0

Other reserves 286 334 463 518 531 557 636 629 797 584 707


Trade credits 184 121 149 157 247 223 267 206 233 290 451


Financial liabilities 159 749 175 243 212 101 245 149 276 668 325 305 355 457 368 025 399 973 427 687 474 289




Loans 1 352 1 665 1 564 2 243 4 641 7 544 10 253 16 584 23 480 22 643 26 271



Investment fund units 11 280 12 898 17 136 20 344 20 648 20 431 21 425 21 608 24 907 27 025 30 805

Insurance technical reserves 14 298 17 473 22 155 26 599 31 219 35 554 39 445 43 302 46 732 49 013 59 451

Life insurance and pension funds 11 650 14 486 18 539 22 517 26 864 30 628 34 117 37 764 40 981 43 043 53 058

Other reserves 2 648 2 987 3 616 4 082 4 355 4 926 5 328 5 538 5 751 5 970 6 393


Trade credits 457 600 464 526 585 384 538 957 884 304 423


Net financial assets -8 236 -8 932 -9 560 -13 271 -13 762 -16 948 -14 632 -10 132 -11 464 -12 460 -18 477

As a percentage of GDP -9.7 -9.9 -9.8 -12.5 -12.1 -13.9 -11.3 -7.5 -8.3 -8.7 -12.6


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Table A.7.23

FINANCIAL TRANSACTIONS WITH THE EXTERNAL SECTOR

Consolidated values

EUR millions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005



Monetary gold and SDRs -16 -17 -1 016 221 -9 -13 145 769 584 507



Loans 83 1 024 1 834 1 867 4 031 6 594 6 302 8 236 -2 345 2 700


Shares and other equity excluding investment funds 2 586 3 711 3 895 985 7 337 5 038 4 782 15 345 10 163 7 406

Investment funds -27 -16 -1 0 -93 -49 69 62 208 147



Other reserves 8 15 11 9 17 8 4 8 7 14

Other transactions 579 640 607 1 012 912 -323 127 249 901 -577

Trade credit 599 555 567 1 017 943 -371 170 220 878 -600

Other transactions excluding trade credit -20 85 40 -5 -31 48 -43 30 23 24



Currency and deposits -1 467 6 087 139 -2 880 8 591 3 366 4 390 8 518 2 156 3 000


Loans 2 798 1 740 3 197 2 104 3 356 5 911 5 062 -729 -1 975 -2 945

Shares and other equity 1 245 2 290 4 050 4 769 9 118 7 710 -1 323 6 929 7 031 1 013

Shares and other equity excluding investment funds 523 2 171 4 244 4 210 9 120 7 002 -1 707 6 979 6 449 -571

Investment funds 722 119 -194 558 -2 708 384 -50 582 1 584

Insurance technical reserves 49 129 55 13 26 79 -7 168 -213 123


Other reserves 49 129 55 13 26 79 -7 168 -213 123

Other transactions 2 000 1 708 341 1 611 687 -484 193 1 351 1 543 1 341

Trade credit 227 679 96 546 967 -228 702 334 515 299

Other transactions excluding trade credit 1 773 1 028 245 1 065 -279 -257 -508 1 017 1 028 1 043

Financial saving(a)1 103 2 752 4 508 7 250 11 114 11 016 8 287 5 380 8 219 11 622



Note: (a) The external financial saving is given by the difference between net acquisition of financial assets (regarding residents) and net incurrence of liabilities of non-residents (regarding residents); it is equal to net lending/borrowing that results from non-financial operations (unless a statistical discrepancy); it is the symmetrical

value of total net lending/borrowing of resident sectors.




Annual Report 2005 | Banco de Portugal 215

Report and Financial Statements | Chapter 8

8. ACTIVITIES OF THE BANK

8.1. Supervision of credit institutions and financial companies, the Guarantee ofDeposits and the Mutual Agricultural Credit Guarantee Fund

8.1.1. Overview

In 2005 prudential supervision and regulatory functions carried out by Banco de Portugal focused,as usual, on the following areas:

• Preparation of and co-operation in draft regulations and legislation, primarily targeted at thereformulation of the legal framework governing the activity of credit institutions and financialcompanies, the improvement of supervisory instruments and methods, and the revision of the legalframework applicable to some financial techniques and products;

• Authorisation for the setting up of credit institutions and financial companies and decision on the

information elements subject to registration;

• Continuous and systematic control of the activity, financial position, risks and adequacy of the ownfunds of credit institutions and financial companies, both on an individual and on a consolidatedbasis;

• Assessment and control, from a prudential perspective, of the restructuring operations of bankingand financial groups and respective institutions, and analysis of the reorganisation and rationalisationprogrammes subsequent to such operations;

• Monitoring of financial reorganisation and winding-up procedures of institutions subject to thesupervision of Banco de Portugal;

• Co-ordination and co-operation with other supervisory authorities, both at national level – namely,participation in Conselho Nacional de Supervisores Financeiros – CNSF (National Council ofFinancial Supervisors) – and at international level, as well as participation in committees andworking groups of the European Union, the European Central Bank (ECB), and of other internationalorganisations.

In addition to the performance of these functions, a highlight for 2005 was the preparation for theassessment of Portugal under the Financial Sector Assessment Program (FSAP) of the InternationalMonetary Fund (IMF), whose first stage was carried out at the end of 2005.

FSAP is intended to identify potential vulnerabilities of the financial sector of IMF member countries,and it has been a preferential instrument for the monitoring of the financial system by the IMF. FSAPhas a major role in contributing to the promotion of financial stability at national and international level,encouraging member countries to make a self-assessment of their financial systems and toimplement the best regulatory and supervisory practices. This programme attaches particularimportance to the articulation between macroeconomic supervision and financial sector supervisionand analyses the interaction between macroeconomic policies and framework and potentialsystemic risks.


Chapter 8 | Report and Financial Statements

8.1.2. Regulatory framework governing the activity of institutions and supervisory functions

In the course of 2005, Banco de Portugal issued a number of regulatory rules and circular letters, withthe aim of enhancing and strengthening the supervisory instruments, adapting them to the increasingcomplexity of both the risks and the financial activity of financial institutions and groups, as well asto the development of the best practice at international level. Some of these rules result from thetransition to the International Accounting Standards/International Financial Reporting Standards(IAS/IFRS). Among the rules and/or instructions issued, mention should be made of the following:

Notices

• Definition of the regime to be complied with by institutions in the preparation of their financialstatements on an individual and on a consolidated basis, in accordance with the InternationalAccounting Standards (IAS), as adopted by Regulation (EC) no.1606/2002, or with the AdjustedAccounting Standards (AAS), defined by this Regulation. Some transitional regimes were alsoestablished (see Notice no.1/2005 of 28 February, as amended by Notice no. 13/2005 of 16 January2006, and Circular Letters no. 13/2005/DSB of 21 March and no. 105/2005/DSB of 22 September);

• Introduction of changes in the regulatory regime governing the own funds and solvency ratio ofinstitutions subject to the supervision of Banco de Portugal, following the adoption of IAS and AAS(see Notice no. 2/2005 of 28 February, amending Notices no. 12/92 and no. 1/93, and Notice no. 14/2005of 16 January 2006);

• Redefinition of the regulatory regime governing the provisions to be set up by credit institutions andfinancial companies, following the adoption of IAS and AAS (see Notice no. 3/2005 of 28 February,amending Notice no. 3/95, and Circular Letter no. 140/2005/DSBDR of 21 December);

• Redefinition of the regulatory regime governing the coverage of liabilities on account of retirementand survival pensions, following the adoption of IAS and AAS (see Notice no. 4/2005 of 28 February,and Notice no. 12/2005 of 16 January 2006, amending Notice no. 12/2001, and Circular Letterno. 143/2005/DSB of 30 December);

• Redefinition of the regulatory regime governing the supervision and control of large exposures ofinstitutions subject to the supervision of Banco de Portugal, following the adoption of IAS and AAS(see Notice no. 5/2005 of 28 February, amending Notice no. 10/94);

• Adaptation of the regulations governing the consolidation scope for prudential supervisionpurposes, following the legislative changes regarding the preparation of consolidated accountsintroduced by Decree-Law no. 35/2005 of 17 February, which transposed into Portuguese lawDirective 2003/51/EC (see Notice no. 6/2005 of 28 February, amending Notice no. 8/94);

• Securities investment fund management companies, which are authorised to make a discretionaryand individual management of portfolios, shall be subject to the supervision on an individual andon a consolidated basis applicable to investment companies (see Notice no. 8/2005 of 6 June,amending Notice no. 7/96);

• Definition of procedures regarding the publication of accounts by institutions subject to thesupervision of Banco de Portugal, following the adoption of IAS and AAS (see Notice no. 9/2005 of24 June, amending Notice no. 6/2003).

Instructions

• Regulation of credit institutions’ involvement in securitisation and “implicit support” provided insuch operations (see Instruction no. 1/2005 of 15 February, revoking Circular Letter no. 34/2003/DSB);



• Redefinition of the prudential regime applicable to the individual or collective management of realestate and securities assets (see Instruction no. 11/2005 of 15 April);

• Reporting of information by credit institutions about the impact on the calculation of own funds andown funds requirements, resulting from the adoption of IAS and AAS (see Instruction no. 15/2005of 4 May and Circular Letter no. 27/2005/DSB of 4 May);

• Definition of rules on the prudential monitoring of the interest rate risk of the overall activity (bankingand trading book) and on the reporting of information on the level of exposure to the interest raterisk of the banking book (see Instruction no. 19/2005 of 15 June);

• Introduction of new requirements regarding the internal control systems, namely the “compliance”risk, the prevention of money laundering operations and the internal audit (see Instruction no. 20/2005of 15 June, amending Instruction no. 72/96 on the internal control system);

• Definition of procedures to be adopted in the recognition and monitoring of internal models thatinstitutions intend to use in the calculation of own funds requirements for the coverage of marketrisks (see Instruction no. 22/2005 of 15 July);

• Revision of the rules applicable to the prevention of the use of the Portuguese financial system formoney laundering purposes (see Instruction no. 26/2005 of 21 July, revoking Instruction no. 8/2002);

• Specification of the supplementary information elements as at 31 December 2004 and31 December 2005, to be reported to Banco de Portugal by the institutions that adopt IAS and AAS,for the compilation of comparable data for the Portuguese financial system as a whole(see Instruction no. 30/2005 of 15 November).

Circular Letters

• Clarification on the application of the accounting rules, to be complied with in the transitional regimeto 2005, by the institutions that must prepare their financial statements on an individual and on aconsolidated basis, or only on an individual basis (see Circular Letter no. 13/2005/DSB of 21 March,following the publication of Notice no. 1/2005 of 28 February);

• Updating, within the scope of the money laundering preventive measures, of the list of countriesand territories considered as “non-cooperative” by the Financial Action Task Force (FATF),recommending increased vigilance by credit institutions and financial companies with regardto operations contracted with residents in those countries or territories (see Circular Lettersno. 20/2005/DSB of 1 April and no. 133/2005/DSB of 29 November);

• Communication of a set of recommendations and principles that credit institutions and similarentities must take into account in their international activity, namely as regards their organisationand definition of their internal control system (see Circular Letter no. 41/2005/DSB of 1 June);

• Communication of a set of principles on Contingency Planning in credit institutions and financialcompanies, to ensure the existence of procedures that guarantee business continuity in crisissituations, in both operational and financial terms (see Circular Letter no. 100/2005/DSB of26 August);

More specifically, measures were also adopted aimed at increasing transparency and consumerprotection, namely:

• Clarification on pre-contractual information to be provided by credit institutions regarding loanrequests for the acquisition of goods or services, submitted by the respective suppliers (seeCircular Letter no. 19/2005/DSB of 24 March);



• Disclosure of information on the so-called “complaints book”, which must be available at all creditinstitutions from January 2006 onwards, (see Circular Letter no. 139/2005/DSB of 20 December,resulting from the entry into force of Decree-Law no. 156/2005);

In 2005 Banco de Portugal participated in the preparation of Decree-Law no. 35/2005 of 17 February2005, which transposes into Portuguese law Directive 2003/51/EC of the European Parliament andof the Council of 18 June 2003, amending Directives 78/660/EEC, 83/349/EEC and 91/674/EEC onthe annual and consolidated accounts of certain types of companies, banks and other financialinstitutions and insurance undertakings, which provides for the scope of application of InternationalAccounting Standards, in accordance with the provisions of Regulation (EC) no. 1606/2002 of theEuropean Parliament and of the Council.

The Bank also participated in the finalisation of draft legal acts for the transposition into Portugueselaw of the following European Community Directives: Directive 2002/87/EC of the European Parliamentand of the Council of 16 December 2002 on the supplementary supervision of credit institutions,insurance undertakings and investment firms in a financial conglomerate; Directive 2001/24/EC ofthe European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up ofcredit institutions. In the meantime, work is also being developed for the transposition into Portugueselaw of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on marketsin financial instruments amending Council Directives 85/611/EC and 93/6/EC and Directive 2000/12/ECof the European Parliament and of the Council, in cooperation with the Securities Market Commission(Comissão do Mercado de Valores Mobiliários – CMVM).

The Bank has also been participating in a Working Group, set up by the Secretariat of State for theTreasury and Finance, to analyse the draft Decree-Law rewording the legal framework applicable tomortgage bonds.

Finally, in 2005 the new capital adequacy framework was approved at European Union level, whichin general terms incorporates the new Capital Accord (Basel II). The two Directives that include thenew capital adequacy requirements regarding credit institutions and investment firms (resulting fromthe amendment of the Codified Banking Directive (2000/12/EC) and the Capital Adequacy Directive(93/6/EEC)) are still pending publication in the Official Journal of the European Union. Two deadlineshave been set for their implementation: 1 January 2007, for the generality of the methods envisaged(credit and operational risk), and 1 January 2008, for more advanced internal methods/approaches(“IRB Advanced”, for credit risk and Advanced Measurement Methods, for operational risk).

In simplified terms, the new regime aims to (i) increase sensitiveness to risk capital requirements;(ii) extend the capital adequacy regime beyond the setting of minimum regulatory ratios, so that therelevance of the action of the supervisory authorities and market discipline are recognised; and (iii)disseminate the “best practice” in the financial system, developing a number of incentives rewardingthe institutions’ capacity to measure and manage risk. Its structure is based on three pillars, i.e.calculation of minimum own funds requirements for the coverage of credit, market and operationalrisk (“Pillar 1”), convergence of supervisory policies and practices and control of risks which are notcovered by Pillar 1 (“Pillar 2”) and reporting of information to the market and to the general public, in orderto ensure increased transparency on the financial situation and solvency of institutions (“Pillar 3”).



8.1.3. Supervisory activities

8.1.3.1. Developments in the universe of institutions

In 2005 the trend decline already observed in previous years in the number of registered creditinstitutions and financial companies (351 on 31 December 2005 down from 375 on 31 December2004 and 390 on 31 December 2003) became more marked. This decline was virtually of the samemagnitude as regards credit institutions and financial companies (see Tables I, II and III).

With respect to credit institutions, the decline still reflects the implementation of Decree-Lawno. 186/2002 of 21 August, which created a new type of credit institution – the so-called “credit financialinstitutions (instituições financeiras de crédito) – whose purpose is the carrying out of operationsauthorised to banks, except for the taking of deposits. In the course of 2005 there were five newregistrations of credit financial institutions, which already outnumber specialised credit institutions(financial leasing companies, factoring companies, credit purchase financing companies andmutual guarantee companies).

On the other hand, banking groups are still proceeding with the rationalisation of their human andmaterial resources. Therefore, in the course of 2005, the registration of seven banks was cancelled,five of which due to incorporation in other entities belonging to the same group. It should be notedthat among the seventy one banks existing at the end of 2005 (a reduction of seven from end-2004),more than one third were branches of banks having their head office in other European Union MemberStates.

A more detailed analysis shows that there were six new registrations of credit institutions – five creditfinancial institutions and a branch of a non-banking credit institution, having its head office in theEuropean Union (EU). Among the five new credit financial institutions, two resulted from thetransformation of companies already registered at Banco de Portugal, one from the transformationof a company previously not subject to registration and two corresponded to the setting-up of newinstitutions. By contrast, the registration of seventeen institutions was cancelled: two branches offoreign credit institutions (banks), five banks due to merger with other institutions (four with banks andone with a financial company), seven mutual agricultural credit banks and three specialised creditinstitutions (two financial leasing companies and one factoring company), the latter three having beenincorporated into a holding company, which was transformed into a credit financial institution.

The number of financial companies declined by thirteen, in net terms, as a result of the registrationof three new institutions and the cancellation of sixteen financial companies. The number ofcancellations was due to the winding up of one group purchase management company, the mergerdue to incorporation of three dealers into banks and the continuation of the restructuring process ofbanking groups, to which contributed the publication of Decree-Law no. 252/2003 of 17 October. ThisDecree-Law, which approved the new legal framework of collective investment undertakings, allowedfor the widening of the business purpose of securities investment fund management companies, i.e.these companies may also be authorised to carry out discretionary and individual portfolio managementon behalf of third parties, to provide investment consultancy services and to manage real estateinvestment funds. This new scenario led to the transformation of these management companies intomore versatile asset management companies, allowing for the introduction of changes in theorganisational structure of national financial groups. Within this scope, in 2005 the activity of threereal estate investment fund management companies was cancelled (one due to winding up and twodue to incorporation into securities investment fund management companies) as well as of six wealthmanagement companies (two ceased their activity, three were incorporated into securities investmentfund management companies and one was transformed into a securities investment fundmanagement company). The cancellation of the registration of the remaining three financial



companies involved a credit card issuing or management company, transformed into a credit financialinstitution, and two exchange offices.

With regard to new registrations of financial companies, two investment fund management companieswere set up (one a securities investment fund management company and another a real estateinvestment fund management company), one due to transformation of the business purpose of awealth management company, and the other due to the registration of a new wealth managementcompany.

In 2005 there was also an increase in the number of representative offices of credit institutions andfinancial companies having their head office abroad (two more, in net terms). By contrast, the numberof holding companies declined by three, as there were only four new registrations, which was notsufficient to offset the cancellation of the registration of seven companies: one due to transformationinto a credit financial institution, one due to winding up, two due to incorporation into other holdingcompanies and three for having ceased to be covered by the provisions laid down in Article 117 ofthe Legal Framework of Credit Institutions and Financial Companies.

Finally, there were twenty six new registrations of credit institutions having their head office in theEuropean Economic Area and providing cross-border services in Portugal, which largely offset thefive cancelled registrations. By geographical origin, eight of these registrations are related to Austriancredit institutions, three to German credit institutions, three to French credit institutions and theremaining twelve to credit institutions from Cyprus, Hungary, Iceland, Ireland, Italy, the Netherlands,Spain, United Kingdom and Sweden.

8.1.3.2. Monitoring of institutions and financial groups

In 2005, as in previous years, the monitoring and systematic assessment of the situation andevolution of credit institutions and financial companies, as well as of the financial groups in whichthey are included, were carried out by supervisory units responsible for one or more groups orinstitutions, based either on monthly, quarterly or half-yearly information elements (accounting andprudential reports on an individual and/or on a consolidated basis), or on data obtained duringinspections, during other on-site checks or on a case-by-case basis, as well as on data producedby rating agencies and analysts.

With regard to the information reported to Banco de Portugal, stress should be laid on the analysisof the level and structure of own funds, as well as of their adequacy to capital requirements forcounterparty risk, trading portfolio risk, exchange rate risk and other risks. The analysis also focusedon the exposure to large risks, the quality of credit and other assets and the respective provisioninglevels, the compliance with other prudential ratios and limits, the financial statements – balance sheetand profit and loss account – and the profitability, productivity and liquidity indicators. Economicprovisions of institutions were also examined, as well as securitisation operations and theirprudential impact. Reference should also be made to the monitoring of the capital adequacy offinancial conglomerates and of the respective shareholding structure, jointly with Instituto de Segurosde Portugal (Portuguese Insurance Institute), within the framework of CNSF.

The analysis of the internal control annual reports also enabled a more qualitative assessment, inparticular with regard to risk management and to the control procedures in force.

Within the scope of the activity plan for 2005, 28 inspections were carried out, covering the mostrelevant institutions in terms of size, ranking in the financial system, complexity of the operationscarried out or specific problems.



Among the inspections carried out in the course of the year, 14 were made to banks, 6 to other typesof credit institutions (namely, mutual agricultural credit banks, savings banks, credit financialinstitutions, factoring companies and investment companies), 7 to financial companies (namely,dealers, investment fund management companies, wealth management companies and exchangeoffices) and one to holding companies.

In addition to inspections of a general nature (9), other inspections were also carried out focusingon specific aspects, such as: solvency, liquidity, large exposures, credit portfolios in general andhousing credit in particular, monitoring and credit recovery policies, securitisation operations,procedures of use on internal ratings, securities portfolios, interest rate risk, financial instrumentsoperations and off-balance sheet accounts, trading and coverage portfolios, and internal controlprocedures, in particular in the field of money laundering prevention.

In the course of 2005, 4 inspections were also made to suspect entities of carrying on non-authorisedactivity.

As usual, inspections to institutions included contracts with the respective management, namelythrough meetings held at the beginning of the process to communicate the objectives of the on-sitechecks to be undertaken, and at the end, to analyse the preliminary conclusions. The final report,summarising the main conclusions of the inspection, is sent to the institutions for comments andadoption of any corrective measures, whose implementation is subsequently monitored.

Meetings were also held, as usual, with the major banking groups for the assessment of their overallsituation and analysis of future development prospects. Moreover, regular contact was establishedwith the institutions’ auditing boards and external auditors.

8.1.4. Consultancy, research and information management activities

Among the consultancy, research and information management activities developed in the courseof 2005, two components should be highlighted:

i) Regular activities covering, in particular, the following areas:

- Setting-up of credit institutions and financial companies, acquisition, merger, splitting, windingup or liquidation of institutions or restructuring of financial groups, and acquisition or disposalof qualifying holdings;

- Carrying on of activities in Portugal, by institutions having their head office abroad, and abroadby national credit institutions (opening up of branches and representative offices and internationalprovision of services);

- Regulatory own funds and prudential ratios or limits;

- Amendments to articles of association (e.g. changes in the business name, structure of themanagement and auditing boards, reduction in equity capital);

- Assessment of the suitability of the members of the corporate bodies of the institutions subjectto supervision, as well as of the possible accumulation of posts and prevention of conflicts of

interest;

- Definition of the scope of the activity authorised to institutions subject to supervision, in

particular with regard to the launching of new products or financial services;

- Monitoring of developments in national financial conglomerates and respective capitalisation

levels;



- Regular monitoring of liquidity risk (both on an individual and on a consolidated basis);

- Quarterly assessment of the overall situation of the Portuguese banking system and of the mainfinancial groups, with particular emphasis on credit growth and respective financing andquarterly analysis of the banking system’s profitability;

- Regular analysis of the exposure of the banking system to specific geographical areas(counterparty risk);

- Revision of the composition of risk classes, for the purpose of setting up country-risk provisions;

- Clarification of issues of a prudential and accounting nature;

- Issue of opinions for the Ministry of Finance and the Ministry of Justice, namely on the activity ofinternational organisations and on draft legislation, and participation in joint working groups onspecific issues;

- Exchange of information and replies to consultations from other national and internationalsupervisory authorities and co-operation with public authorities;

ii) Activities related to the introduction of regulations of a prudential or accounting nature, of which thefollowing should be highlighted:

- International Accounting Standards (IAS) – Revision of prudential regulation given the need toimplement “prudential filters”, as a result of the adoption of “international accounting standards”and “adjusted accounting standards” (regulations on own funds, solvency ratio, provisions,limits to large exposures, coverage of liabilities on account of retirement and survival pensionsand consolidation scope for prudential supervision purposes); preparation of regulatoryinstruments of an accounting nature, namely within the scope of the application of IAS/AAS, theconcepts of credit overdue and imparity, and the accounting regime to be adopted in 2005;

- Implementation of Basel II / Capital Requirements Directive – setting up of a Working Group withAssociação Portuguesa de Bancos (Portuguese Banking Association) to discuss theimplementation of issues related to the new capital adequacy framework. Study on theestablishment of a prudential regime on the interest rate risk of the banking book; definition ofthe work programme for the informal stage of the model approval process;

- New observation exercise of the capitalisation levels of national financial conglomerates (jointlywith Instituto de Seguros de Portugal and Comissão do Mercado de Valores Mobiliários, withinthe scope of CNSF).

Another important aspect was the conceptual definition of a risk assessment model of financialinstitutions, to be implemented by Banco de Portugal in the performance of its supervisory powers:characterization of the “Risk Assessment Model”, with the definition of its objectives, structure,methodology and implementation procedures.

With respect to the information systems, the following should be highlighted:

- BPnet system – Provision of access to the prudential information reception service, through theBPnet portal;

- Update and creation of data collection applications as regards the regulatory rules issued;

- Utilisation and analysis of the information provided by the main rating agencies;



8.1.5. Claims and breaches of regulations

In 2005, 1,242 claims were submitted to Banco de Portugal mainly by the customers of supervisedinstitutions and 1,257 proceedings were concluded. These claims arose in particular from allegedirregularities in the operation of bank accounts and banking costs, housing loans, consumer credit,cheques, bank guarantees and transfers, non-authorised activity, interest rates, transferable securities,rules of conduct and bank secrecy.

Twenty one breach-of-regulations proceedings were initiated, in response to situations in whichrecourse to the preventive measures and instruments at the disposal of Banco de Portugal provedinsufficient or inadequate. These were related, in particular, to the non-compliance with reportingrequirements to Banco de Portugal; non-compliance with rules of conduct, accumulation of posts andinsufficient own funds; non-compliance with the rules of special legal frameworks governing theactivity of several financial companies; carrying on of non-authorised activity; violation of the reportingrequirement laid down in Law no. 5/2002; violation of the provisions of the laws preventing the useof the financial system for money laundering purposes.

The table below shows relevant data for 2005 with regard to proceedings settled:

PROCEEDINGSSETTLED DEFENDANTS PENALISED APPEALS

13 individuals 8

10 2 credit institutions 1

4 financial companies 1

INFRACTIONS

- Violation of the identification rules of qualifying shareholders;

- Performance of management functions before registration with Banco de Portugal;

- Omission of information that should be provided to Banco de Portugal within a specific period of time;

- Violation of the provisions of the preventive legislation on the use of the financial system for money

laundering purposes, as regards the identification of customers;

- Granting of credit to members of corporate bodies;

- Non-compliance with prudential rules – fixed assets and solvency ratios;

- Violation of the provisions laid down in Chapter II of Law no. 5/2002 of 11 January.



8.1.6. Co-operation with other supervisory authorities and international activity

Within the scope of the co-operation between national supervisory authorities, stress should be laidon the activities developed by Conselho Nacional de Supervisores Financeiros – CNSF (NationalCouncil of Financial Supervisors, which is composed of Banco de Portugal, Comissão do Mercadode Valores Mobiliários and Instituto de Seguros de Portugal. In accordance with the responsibilitiesentrusted to CNSF, several issues of common interest for supervisory authorities have beendiscussed, namely: i) supervision of financial conglomerates – new evaluation exercises ofcapitalisation levels and co-ordination of the transposition into Portuguese law of the respectiveEuropean Community Directive; ii) application of the IAS to financial sector entities; iii) monitoring ofdraft European Community Directives of a horizontal nature and/or of their transposition, in particularthe draft Directive on the statutory audit of individual and consolidated accounts (Model of the publicoversight systems for statutory auditors and statutory audit firms); iv) preparation of the “FinancialSector Assessment Program” (FSAP) of the International Monetary Fund (IMF) – co-ordination of worksbetween authorities and analysis of regulatory issues of a transversal nature. As regards some ofthese issues, working groups have been set up to further develop several aspects and put forwardproposals to be submitted for the appraisal of CNSF.

A Memorandum of Understanding between Banco de Portugal and Instituto de Seguros de Portugalwas concluded relating to the co-operation between the two authorities in the field of supervision.

Still regarding the co-operation with other authorities at national level, it should also be noted theparticipation in the preparatory work for the evaluation of the Portuguese system for the preventionand repression of money laundering and terrorism financing, which will be made in 2006, within thescope of the third round of mutual evaluation of the Financial Action Task Force (FATF).

At international level, the regular co-operation and exchange of information were further pursued withthe banking supervisory authorities of other EU Member States, as well as of non-EU countries.Reference should also be made to the monitoring of legislative and regulatory developments, inparticular at European level, including the participation in several committees and working groups.Among the different subjects dealt with, reference should be made, on the one hand, to those leadingto the harmonisation of prudential regulations – inter alia, revision of the capital adequacy regime,implementation of international accounting standards, supplementary supervision of financialconglomerates, and revision of the consumer credit regime – and, on the other hand, to issues ofparticular interest for the supervisory authorities, such as macroprudential analysis, structuraldevelopments of the European banking systems and financial stability, strengthening of theco-operation between authorities regarding the management of crises and the convergence ofsupervisory practices. In this regard, in 2005 the Committee of European Banking Supervisors(CEBS), published the following orientation documents: “CEBS Guidelines on Supervisory Disclosure”and “CEBS Guidelines on Financial Reporting”, as well as the preparation of the documentspublished in January 2006: “CEBS Guidelines on Common Reporting”, “CEBS Guidelines on theRecognition of External Credit Assessment Institutions”, “CEBS Guidelines on SupervisoryCooperation for Cross-border Banking and Investment Firm Groups”, “CEBS Guidelines on SupervisoryReview Process”.



8.1.7. Deposit Guarantee Fund

At the end of 2005, 49 credit institutions authorised to take deposits were members of the DepositGuarantee Fund, namely 39 banks, 5 savings banks and 5 mutual agricultural credit banks.Compared with 31 December 2004, there was a reduction of 1 bank, due to the merger by incorporationinto another credit institution.

In 2005 annual contributions of member credit institutions to the Fund amounted to €41 million,€28 million of which were settled in cash and the remaining €13 million were replaced by theassumption of irrevocable payment commitments, collateralised by eligible securities.

On 31 December 2005 the financial resources of the Fund amounted to €1,171 million, reflecting ayear-on-year growth of €53 million. On the same date, the volume of deposits covered by the guaranteesystem remained virtually unchanged from a year earlier, at around €115 billion.

The net result for the year 2005 amounted to €11 million, mainly accounted for by the yield oninvestments made by the Fund in public debt securities and, to a lesser extent, by gains from the saleand valuation of securities. Compared with 2004, the net result for 2005 represents a decline of€7 million, due to the low short-term interest rates prevailing in the market for euro area short-termpublic debt placements.

The ratio between the own funds of the Deposit Guarantee Fund and deposits covered by theguarantee increased from 0.94% to 1% between December 2003 and 31 December 2004. On31 December 2005 this ratio is also expected to record a slight increase.

The base contribution rate for 2005 was set at 0.0375%, while the weighted effective contribution rate,settled in cash, of each credit institution, calculated according to the respective capital adequacy ratio,ranged between 0.03% and 0.045% of the annual balance of deposits corresponding to the reservebase. The limit on irrevocable payment commitments that could be used for the partial replacementof the annual contribution was set at 33% of the amount of contributions calculated.

With regard to regulations, Banco de Portugal issued Notice no. 7/2005, published in the OfficialGazette, Series I-B 6 of June 2005, amending paragraph 3 of the Notice of Banco de Portugal no. 11/94,which set at a maximum of 0.2% the annual contributions rate to the Fund. Instructions no. 27/2005and no. 28/2005, published in the Official Bulletin of Banco de Portugal, set at 0.03% and 15%respectively the base contribution rate and the limit of the irrevocable payment commitment in 2006.

31 Dec. 2002 31 Dec. 2003 31 Dec. 2004

Resources of the Fund 928 1,047 1,118

Deposits covered by the guarantee 109,939 111,270 111,671

Ratios 0.84% 0.94% 1.00%

DEGREE OF COVERAGE OF DEPOSITS UNDER THE GUARANTEE EUR millions



8.1.8. Mutual Agricultural Credit Guarantee

The Mutual Agricultural Credit Guarantee Fund (Fundo de Garantia do Crédito Agrícola Mútuo –

FGCAM), was established by Decree-Law no. 182/87 of 21 April. Its main task consists in guaranteeing

the repayment of deposits opened with the central mutual agricultural credit bank (Caixa Central de

Crédito Agrícola Mútuo) and with the mutual agricultural credit banks (Caixa de Crédito Agrícola

Mútuo) participating in the Integrated System of Mutual Agricultural Credit (Sistema Integrado do

Crédito Agrícola Mútuo - SICAM) – which pay FGCAM an annual contribution according to Notice

no. 14/2003 of Banco de Portugal – and in promoting and undertaking any action deemed necessary

to ensure the solvency and liquidity of participating banks.

On 31 December 2005, 113 agricultural credit institutions participated in FGCAM, i.e. 7 less than a

year earlier (due to mergers). These institutions contributed with €13.7 million to the Fund in 2005.

On 31 December 2005, FGCAM’s own funds amounted to €209.5 million, accounting for a

€12.8 million increase comparing with December 2004. Investments for the guarantee of deposits

taken by banks participating in SICAM (in accordance with and for the purpose of Article 11 of

Decree-Law no. 345/98) stood at €40 million, i.e. €4 million more than at the end of 2004, and

accounted for 19% of FGCAM’s gross assets and around 0.50% of the volume of deposits covered

by the guarantee scheme, estimated at €8,000 million on 31 December 2005. The balance of free

investments, which can be used in financial aid to SICAM, stood at €15.2 million at the end of the year.

Within the framework of its business purpose, FGCAM has granted subsidies and loans, to both the

central mutual agricultural credit bank and to mutual agricultural credit banks, and subsidies to

FENACAM, i.e. the National Federation of Mutual Agricultural Credit Banks. In 2005 FGCAM continued

to monitor and financially aid SICAM, following the policy of previous years.

Until 31 December 2005, loans granted by FGCAM to SICAM totalled €212.7 million, of which

€58.9 million have already been repaid by 20 CCAM (€5.2 million correspond to repayments in 2005).

On that date the assistance contracts in force involved loans granted by FGCAM to the amount of

€153.84 million (of which 3 loans to the amount of €29 million were granted in 2005), i.e. 18% higher

than the figure recorded on 31 December 2004.



No. of institutions

2005 2004

Credit institutions

Banks, including 61 68

Branches of banks of other EU Member States 22 24

Branches of banks of non-EU countries 1 1

Savings banks(1) 8 8

Central and Mutual agricultural credit banks(2) 121 128

Credit financial institutions 15 10

Investment companies(3) 3 3

Financial leasing companies (leasing) 4 6

Factoring companies 3 4

Credit purchase financing companies 4 4

Mutual guarantee companies 3 3

Branches of other foreign credit institutions 13 12

Subtotal 235 246

Financial companies

Dealers 4 7

Brokers(4) 10 10

Foreign-exchange or money-market mediating companies 1 1

Investment fund management companies(5) 44 45

Credit card issuing or management companies 2 3

Wealth management companies 17 22

Group purchase management companies(6) 12 13

Exchange offices 20 22

Credit securitisation fund management companies 4 4

Other companies 2 2

Subtotal 116 129

Representative offices of credit institutions and

financial companies having their head office abroad 30 28

Holding companies 49 52

Total 430 455

Credit institutions having their head office in a EEA(*),

country and providing cross-border services 361 340

(1) Of which on 31 December 2005, three had undergone winding up procedures.(2) Of which on 31 December 2005, two had undergone winding up procedures.(3) Of which on 31 December 2005, one had undergone winding up procedures.(4) Of which on 31 December 2005, two had undergone winding up procedures.(5) Of which on 31 December 2005, one had undergone winding up procedures.(6) Of which on 31 December 2005, eight had undergone winding up procedures.(*) European Economic Area.

Table I

INSTITUITIONS REGISTERED AS AT 31 DECEMBER 2005



No. of institutions

2005 2004

Credit institutions

Banks, including - 2

Branches of banks of other EU Member States - -

Branches of banks of non-EU countries - -

Savings banks - -

Central and Mutual agricultural credit banks - -

Credit financial institutions(1) 5 7

Investment companies - -

Financial leasing companies - -

Factoring companies - -

Credit purchase financing companies - -

Mutual guarantee companies - -

Branches of other foreign credit institutions 1 -

Subtotal 6 9

Financial Companies

Dealers - -

Brokers - -

Foreign-exchange or money-market mediating companies - -


Credit card issuing or management companies - -

Wealth management companies 1 1

Group purchase management companies - -

Exchange offices - 2

Credit securitisation fund management companies - 1

Other companies

Subtotal 3 5

Representative offices of credit institutions and

financial companies having their head office abroad 4 2

Holding companies 4 -

Total 17 1 6

Credit institutions having their head office in a EEA(*),

country and providing cross-border services 26 28

(1) Of which, one due to the transformation of a holding company and one due to the transformation of a credit card issuing or management company and onedue to the transformation of a company not subject to special registration.

(2) Of which, one due to the transformation of a wealth management company.(*) European Economic Area.

Table II

REGISTRATIONS IN 2005 | NEW INSTITUTIONS



No. of institutions

2005 2004

Credit institutions

Banks, including(1) 7 2

Branches of banks of other EU Member States(2) 2 -

Branches of banks of non-EU countries - -

Savings banks - -

Central and Mutual agricultural credit banks(3) 7 -


Credit financial institutions - -


Financial leasing companies(4) 2 6

Factoring companies(5) 1 2

Credit purchase financing companies - 6

Mutual guarantee companies - -

Branches of other foreign credit institutions - 1

Subtotal 17 17Financial Companies

Dealers(6) 3 -

Brokers - 1

Foreign-exchange or money-market mediating companies - -


Credit card issuing or management companies(8) 1 -

Wealth management companies (9) 6 3

Group purchase management companies(10) 1 4

Exchange offices(11) 2 1

Credit securitisation fund management companies - -

Other companies - -

Subtotal 16 12

Representative offices of credit institutions and financial companies having their head office abroad 2 1

Holding companies(12) 7 8

Total 42 38

Credit institutions having their head office in a EEA(*),country and providing cross-border services 5 6

(1) Of which, four Portuguese banks due to incorporation into other banks and one Portuguese bank due to incorporation into a dealer.(2) One of the cancellations was due to the closing down of activity in Portugal and the other continuing the activity in Portugal providing cross-border services.(3) Six of the cancellations were due to incorporation into other mutual agricultural credit banks and one was due to winding up.(4) Both due to incorporation into a holding company.(5) Due to incorporation into a holding company.(6) All due to incorporation into three banks.(7) One of the cancellations was due to winding up and the remaining were due to incorporation into two securities investment fund management companies.(8) Due to transformation into a credit financial institution.(9) Three of the cancellations were due to incorporation into three securities investment fund management companies, two were due to winding up and one was

due to transformation into a securities investment fund management company.(10) Due to caducity.(11) One was due to winding up and another was due to revocation of authorisation.(12) One of the cancellations was due to transformation into a credit financial institution, two were due to incorporation into other holding companies, one was

due to winding up and three for having ceased to be subject to the provisions laid down in Article 117 of the Legal Framework of Credit Institutions andFinancial Companies.

(*) European Economic Area.

Table III

CANCELLATIONS IN 2005



8.2. Currency issuance

8.2.1. Banknote issuance

The circulation of the euro, as a common currency used in a wide economic area, was characterisedby the continued and large-scale cross-border migration of banknotes, resulting mainly from tourism,business activity and, ultimately, from the free movement of persons within the Economic andMonetary Union zone.

This reality has prevented national central banks within the Eurosystem from determining the realcirculation in their geographical areas – NCB can only account for the banknotes issued or withdrawnfrom circulation through the banking system – in contrast with the previous procedure involvingnational currencies.

Against this background, only total circulation in the whole group of countries integrating the euro areacan be taken as a fully valid indicator to assess the behaviour of the monetary issuance aggregate.Nonetheless, it is recognised that approximately 10 to 20%, in terms of value, of the total currency putinto circulation by national central banks in the euro area is likely being used outside this area. Thisis due to the fact that the euro is a stable currency and is easily accepted at the international level.

Although the data on banknotes put into circulation by each central bank are no longer a reliablemeasure for estimating the quantity and the value of banknotes circulating in each country,1 theanalysis of the behaviour of this indicator should still be taken into account, as it makes it possibleto identify the national behaviours and trends in the use of cash as a payment instrument.

At the end of 2005 the item “banknotes in circulation” in the Banco de Portugal’s balance sheetrecorded a value of €12,839 million,2 representing the theoretical share of euro banknotes incirculation allocated to Portugal in total circulation in the euro area. In effect, the total value of liabilitieson account of euro banknotes in circulation in the euro area is allocated in accordance with the“banknote allocation key”, which takes into account the European Central Bank’s 8% share in that totaland the allocation of the remaining 92% to the different national central banks, according to the “keyfor subscription to the European Central Bank’s capital”.

As at the end of the year, the value of banknotes put into circulation by Banco de Portugal3 stood at€5,024 million, which represents a rise of 0.4% vis-à-vis the value recorded in 2004 (€5,002 million),corresponding to an increase of €22 million in absolute value.

(1) Which results from considering, for that purpose, only banknotes issued by the respective central bank, when a part of total banknotes in circulation in thecountry is known to have been issued by other euro area national central banks.

(2) This value reflects an increase of 12.8 % against the balance sheet value of 2004, which stood at €11,386 million. In the same period, the effective growth inbanknote circulation in the countries integrating the euro area reached 12.8%.

(3) The value of banknotes put into circulation is estimated by deducting the value of banknotes issued held by Banco de Portugal from the total value ofbanknotes issued by Banco de Portugal since the introduction of the euro (Issuance - Inventories of banknotes issued). As at the end of 2005, total banknoteissuance reached €9,646 million, and the inventories of banknotes issued held by the Bank stood at €4,622 million.



As shown in the table, the utilisation of cash in Portugal is mainly based on the lowest denominations.The €5, €10 and €20 banknotes as a whole account for the bulk of banknotes in circulation (95.1%in value; 99.1% in quantity).

These percentages also reflect the increasing importance of those three denominations vis-à-visother denomination in total banknotes put into circulation by Banco de Portugal, when comparedto the percentages recorded in previous years. This trend was more marked in the case of the€20 banknote (whose weight, in value, went up from 59.4% in 2004 to 71.3% in 2005).

Confirming developments observed since the introduction of the euro, the €20 banknote is increasinglythe standard denomination of the cash payment system in Portugal, unlike the trend seen in the othereuro area countries as a whole, where the €50 banknote is the most used banknote in terms ofthe quantity of banknotes in circulation (35% do total), but sharing that position with the €500banknote, when considering the value of banknotes in circulation (32.8% for the €500 euro banknote,32.1% for the €50 euro banknote).

The structure of banknotes put into circulation by Banco de Portugal is the direct result, inter alia, ofthe following factors: the habit acquired of paying in cash, which is naturally associated with theprevailing price system; policies of cash distribution adopted by the banking system, particularlythrough ATMs; economic/social development of the country; and the weight/development of informaleconomy.

At the end of 2005, the average value of banknotes put into circulation by Banco de Portugal reachedthe lowest level recorded in the past seven years, standing at €14.67, €1.43 less than in 2004. Thiswas mostly due to growth in demand for the €20, €10 and €5 denominations.

Quantity Value Weight Quantity Value Weight Quantity Value

500 0.12 60 1.2 0.55 276 5.5 0.43 216

200 -0.50 -99 -2.0 -0.74 -148 -2.9 -0.24 -49

100 1.79 179 3.6 -1.06 -106 -2.1 -2.85 -285

50 16.60 830 16.6 4.46 223 4.4 -12.14 -607

20 148.60 2,972 59.4 179.15 3,583 71.3 30.55 611

10 68.09 681 13.6 79.04 790 15.7 10.95 109

5 75.90 379 7.6 81.05 405 8.1 5.16 26

Total 310.60 5,002 100.0 342.46 5,024 100.0 31.86 22

DEVELOPMENTS IN BANKNOTES PUT INTO CIRCULATION | 2004 - 2005

2004 2005 ΔΔΔΔΔ 2004-2005

U: 106 banknotes, 106 EUR

Denomination (€)

(value)% (value)%



Year EUR

2002 19.40

2003 18.16

2004 16.10

2005 14.67

AVERAGE VALUE OF BANKNOTES IN CIRCULATION

(4) This occurs when the value of the stocks of a certain denomination held by the central bank (banknotes to be put into circulation) exceeds the issuance valuerecorded for the same denomination, due to the inflow of banknotes issued by other national central banks.

DEVELOPMENTS IN THE QUANTITY OF BANKNOTES PUT INTO CIRCULATION | 2005

DEVELOPMENTS IN THE VALUE OF BANKNOTES PUT INTO CIRCULATION | 2005

At the end of the year, as in 2003 and 2004, the€200 banknote recorded a negative circulationvalue4 (-0.74 million banknotes). A negativecirculation value was also observed in the €100denomination (-1.06 million banknotes). Indeed,the utilisation of these two denominations israther low in Portugal, revealing the weak demandfor these banknotes by the banking system.

In the same sense, the €50 banknote followedthe downward trend already seen in the previousyear, although not reaching negative circulationvalues, declining by around €607 million, invalue, from 2004 (-73.1%).

On the contrary, the quantity of €500 banknotesput into circulation by Banco de Portugalincreased from €60 million at the end of 2004,to €276 million at the end of 2005.

In terms of annual developments, the value ofthe banknotes put into circulation by Banco dePortugal showed a relative stabilisation, as in2004, which can be confirmed when comparingthe respective curves for the last two years (nextchart).

In monthly terms, developments followed theexpected seasonal pattern, i.e., the highestcirculation values occurred in the summer (Julyand August) and around Christmas. Thesharpest decreases occurred immediately afterthese periods.

Also in 2005, the value of euro banknotes putinto circulation by Banco de Portugal stoodpermanently below the final value of circulationof escudo banknotes. However, for the abovereasons, this does not mean that the realvalue of euro banknotes in circulation is lowerthan the value determined as at 31 December2001.

The conclusions to be drawn from the analysisof the structure of banknotes put into circulationby Banco de Portugal may be confirmed by theobservation of the structure of cash withdrawalsat ATMs in the course of the year. In effect, in2005, similarly to the previous year, the €20banknote recorded the highest withdrawals,followed by the €10 and €5 banknotes. As a



whole, these three denominations accounted for 98% of total banknotes made available to the publicat the ATM network. This is all the more relevant when ATMs are increasingly becoming the main cashdispenser.

In February 2005, some changes were introduced in the policy stipulating the minimum withdrawalsat ATMs. As a result, the minimum withdrawal amount was raised from €5 to €10. This move, whichwas the exclusive responsibility of the banking system, explains the changes observed in totalwithdrawals at ATMs, when comparing 2004 and 2005: the weight of the €5 banknote declined by4 p.p., whereas the €10 banknote increased by 3 p.p., and the €20 banknote went up by 1 p.p.. Theweight of the €50 banknote, available only in some ATMs, remained virtually unchanged.

In turn, it is interesting to analyse the differencesbetween circulation structures in Portugal(banknotes put into circulation by Banco dePortugal) and in the euro area (real circulation).In Portugal, as mentioned above, the structure ofcirculation is concentrated in the threedenominations with lower value (95.1% of thetotal), with the highest weight in the €20 banknote(71.3%), whereas the euro area countries showa clear predominance for higher denominations,with the €500, €100 and €50 banknotes, as awhole, accounting for 82.8% of the total.

STRUCTURE OF BANKNOTE CIRCULATION (Value) | 2005Portugal versus Eurosystem

Quantity Weight (%) Quantity Weight (%) Quantity Weight (p.p.)

500 0 0 0 0 0 0

200 0 0 0 0 0 0

100 0 0 0 0 0 0

50 22 2 24 2 1 0

20 659 46 723 48 65 1

10 388 27 458 30 70 3

5 357 25 313 21 -44 -4

Total 1.426 100 1 519 100 92 0

2004 2005 ΔΔΔΔΔ 2004-2005

U: 106 banknotes

Denomination (€)

WITHDRAWALS AT ATMS | 2004 - 2005



By means of a migration ratio at the Eurosystemlevel, it is possible to estimate trends in banknotemigration at the national level, vis-à-vis the euroarea countries as a whole.

The €50, €100 and €200 banknotes presentedmigration ratios considerably above the unit,which leads to the conclusion that a large amountof high denomination banknotes issued by othereuro area central banks circulated in Portugal.This seems to influence the behaviour of demandfor these denominations by the banking systemand naturally explains the negative circulationvalues recorded for the €100 and €200banknotes and the developments towards thesame direction recorded by the €50 banknote.

Conversely, the €5, €10, €20 and €500denominations showed negative migrationratios, reflecting “exports” of banknotes fromPortugal to other euro area countries.

Overall, the migration ratio was balanced around the unit, due to the high weight of demand and tothe utilisation of lower-value denominations vis-à-vis other denominations.

Deposits and withdrawals of banknotes

In the course of 2005 deposits and withdrawals at the Banco de Portugal’s counters by creditinstitutions followed their typical seasonal pattern, already observed when the escudo was the legaltender currency, with peaks occurring around Easter and Christmas and during summer months.

The total amounts of banknotes deposited and withdrawn stood at €12,349 million and €12,367million respectively. The ratio of deposits to withdrawals stood at 99.9%, against 103.4% in 2004.

Regarding developments in deposits (in termsof quantity), there was an increase in mostmonths (except January) vis-à-vis thecorresponding periods of the previous year.The peak of banknote deposits was reached inAugust (70.7 million banknotes). In 2005 totaldeposits in value exceeded by 6.3% those madein 2004.

As expected, the €20 banknote was themost deposited, followed by €10 and €5denominations. The highest denominationdeposits (€500, €200 and €100) declinedvis-à-vis 2004, similarly to the €5 banknote.

DEVELOPMENTS IN WITHDRAWALS AND DEPOSITS OF BANKNOTES | 2005

2005

500 0.80

200 2.08

100 1.90

50 1.30

20 0.91

10 0.96

5 0.97

Total 0.98

PT deposits / PT withdrawals*MR =

Eurosystem deposits / Eurosystem withdrawals

(ratio adjusted for circulation growth)

MR <1 > Exports, MR >1 > Imports

MIGRATION RATIO *

Denomination (€)



In most months, withdrawals of banknotes grewvis-à-vis the corresponding months of theprevious year. Following the same seasonalpattern observed in past years, the highestwithdrawals were reached in July and December.In consolidated and value terms, totalwithdrawals in 2005 exceeded by 10% thosemade in 2004.

Withdrawals in €20, €10 and €5 banknotesaccounted for more than 92% of the total volumeof banknotes delivered by Banco de Portugal tocredit institutions, with special emphasis on the

Quantity Value Weight (value) % Quantity Value % (value)

500 0.55 276.28 2.2 0.58 288.77 -4.3

200 0.50 100.06 0.8 0.58 116.53 -14.1

100 6.91 690.55 5.6 8.32 831.95 -17.0

50 60.81 3,040.30 24.6 60.47 3,023.27 0.6

20 276.70 5,533.95 44.8 248.31 4,966.28 11.4

10 210.13 2,101.32 17.0 171.19 1,711.92 22.7

5 121.26 606,28 4.9 136.04 680.18 -10.9

Total 676.85 12,348.74 100.0 625.49 11,618.91 6.3

DEVELOPMENTS IN DEPOSITS | 2004-2005

2005 2004 ΔΔΔΔΔ 2004-2005

U: 106 banknotes 106 EUR

Denomination (€)

Quantity Value Weight (value)% Quantity Value %(value)

500 0.97 484.86 3.9 0.69 343.21 41.3

200 0.25 50.40 0.4 0.22 43.17 16.8

100 4.02 401.97 3.3 4.76 476.40 -15.6

50 48.73 2,436.66 19.7 51.31 2,565.37 -5.0

20 307.47 6,149.45 49.7 267.98 5,359.52 14.7

10 221.22 2,212.23 17.9 175.54 1,755.43 26.0

5 126.31 631.54 5.1 139.64 698.21 -9.5

Total 708.98 12,367.11 100.0 640.13 11,241.31 10.0

DEVELOPMENTS IN WITHDRAWALS | 2004 - 2005

2005 2004 ΔΔΔΔΔ 2004-2005Denomination (€)


increase in demand for the €10 banknote, chiefly to the detriment of the €5 banknote. This is due,as already mentioned, to the change in the minimum withdrawal policy in ATMs introduced in2005. Therefore, Banco de Portugal, by Circular Letter no. 07/2005/DET, addressed to thebanking system, warned that credit institutions must continue to ensure the distribution ofbanknotes through ATMs complying with the structure of fiduciary circulation in the country. Inparticular, they shall meet the demand for low denomination banknotes (€5 and €10).

DEVELOPMENTS IN TOTAL DEPOSITS OF BANKNOTES



Withdrawal from circulation of banknotesdenominated in escudos

Continuing the trend observed in the two previousyears, the pace of withdrawal of escudo-denominated banknotes by Banco de Portugaldeclined further in 2005, and the value ofexchanges was merely residual.

Banco de Portugal, through credit institutions ordirect exchange at its counters, withdrew fromcirculation approximately 550 thousandbanknotes, worth €7.7 million. There are still13.02 million banknotes to be withdrawn from

circulation, equivalent to €122.08 million, whose plates were in force as at the date of entry of the eurointo circulation. As regards the plates that had been withdrawn from circulation prior to 31 December2001, their total amounts to €100.83 million.

Denomination

10000$ 0.01 0.04 0.05 0.46 2.01 2.46

5000$ 0.03 0.13 0.16 0.68 3.26 3.94

2000$ 0.01 0.04 0.05 0.06 0.42 0.48

1000$ 0.04 0.09 0.13 0.19 0.44 0.63

500$ 0.02 0.04 0.06 0.06 0.10 0.16

100$ 0.05 0.00 0.05 0.02 0.00 0.02

50$ 0.02 0.00 0.02 0.00 0.00 0.00

20$ 0.04 0.00 0.04 0.00 0.00 0.00

Total 0.21 0.34 0.55 1.48 6.22 7.70

BANKNOTES DENOMINATED IN ESCUDOS | 2005

Withdrawn from circulation in 2005

Quantity Value


Withdrawn fromcirculation up to

31.12.2001

In circulation as at 31.12.2001 Total


31.12.2001


Denomination

10000$ 0.24 0.49 0.73 11.77 24.41 36.18

5000$ 1.18 1.86 3.04 29.49 46.34 75.82

2000$ 0.58 1.93 2.51 5.74 19.28 25.01

1000$ 5.02 4.12 9.14 25.04 20.55 45.59

500$ 5.71 4.62 10.33 14.24 11.51 25.75

100$ 19.20 0.00 19.20 9.58 0.00 9.58

50$ 9.13 0.00 9.13 2.28 0.00 2.28

20$ 27.08 0.00 27.08 2.70 0.00 2.70

Total 68.13 13.02 81.15 100.83 122.08 222.91

To be withdrawn from circulation as at 31.12.05

Quantity Value


31.12.2001In circulation

as at 31.12.2001 TotalWithdrawn fromcirculation up to

31.12.2001


DEVELOPMENTS IN TOTAL WITHDRAWALS OF BANKNOTES | 2005

0

10

20

3040

5060

7080

90

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

106

2004 2005

bank

note

s



Production and plan for the delivery of banknotes

Since the introduction of the euro, the annual production of banknotes has been allocated to NCBsaccording to a decentralised production scheme with pooling. Thus, each central bank is responsible,on an annual basis, for the production of only one or two denominations to meet not only its own needs,but also the needs of other central banks. This production is equivalent to a share of the total needsof the Eurosystem.

This policy aims at ensuring the supply of banknotes of a consistent and uniform quality, reducingthe number of printing works for each denomination, and mainly at obtaining economies of scale inthe productive process. The decentralised production model implies that NCBs exchange amongthemselves the newly printed banknotes they need to include in their annual logistical stocks.

The annual production of banknotes allocated to NCB in 2005 totalled 3,630 million banknotes,accounting for an increase of approximately 125% from production in 2004 (1,598 million banknotes).This production volume was intended to cover the expected increase in circulation in 2005, to replacebanknotes no longer fit for circulation and also to ensure that NCBs have sufficient logistical stocksto accommodate extraordinary requests for banknotes. If due to unforeseen increases in demandthere are no sufficient banknote stocks available at the local level, NCBs may also resort to theEurosystem Strategic Stock.

In 2005 Banco de Portugal was allocated the production of 116.4 million €20 banknotes, which,similarly to previous years, was commissioned to Valora S.A. printing works.5

In the course of the year Valora S.A. delivered 136.77 million €20 banknotes to Banco de Portugal,including 20.37 million banknotes pertaining to the order submitted in 2004 and not fully met inthat year.

In terms of the exchange of banknotes among central banks, Banco de Portugal delivered a total of128.9 million banknotes to other NCBs, broken down into 93.9 million €20 banknotes, correspondingto remittances foreseen in the annual delivery plan, and 35 million €50 banknotes, correspondingto an extraordinary remittance taken from the logistical stock of Banco de Portugal in order to meetan additional request made by another NCB experiencing a shortage in that denomination.

In turn, Banco de Portugal received 176.6 million banknotes in different denominations from otherNCBs, of which 115.66 million correspond to the annual delivery plan and 61 million7 to extraordinaryrequests made by Banco de Portugal to meet unexpected growth in demand for €10 and €500banknotes.

In 2005, Banco de Portugal received on a temporary and return basis 33.9 million €20 banknotes fromthe Eurosystem Strategic Stock, to be kept under the custody of the Bank and to be returned in the firsthalf of 2006.

At the production level, Banco de Portugal continued to monitor the participation of Valora S.A. inprojects developed by the European Central Bank, namely calibration and correlation tests involvingall euro banknote printing works, and in the Dummy Banknotes project (tests to banknote features).

(5) A company whose major shareholder is Banco de Portugal.(6) 82.2 million €5 banknotes and 33.4 million €10 banknotes.(7) 60 million €10 banknotes and 1 million €500 banknotes.



Sorting and quality of banknotes in circulation

In 2005, banknotes returned to Banco de Portugal by means of credit institutions’ deposits were, asusual, processed by sorting systems according to pre-established quality standards that ensure theirauthenticity and quality, so as to determine those banknotes that are fit for recycling and those thatshould be replaced.

Banknotes received at the counters of Banco de Portugal were also analysed with recourse toindividual analysis equipment, chiefly in order to ensure that they are genuine and comply with theprinciples governing the exchange of mutilated banknotes.

In 2005, 728 million euro banknotes were processed by sorting systems, i.e. approximately 9% morethan in the previous year, a trend that is naturally in line with developments in deposits.

(8) Ratio of the annual total of processed banknotes deemed unfit for recycling (granulated or perforated) to the annual total of processed banknotes.

Denomination (€) 2004 2005 ΔΔΔΔΔ 2004-2005

500 0.58 0.54 -8%

200 0.59 0.50 -16%

100 8.75 7.21 -18%

50 74.24 69.23 -7%

20 256.29 285.92 12%

10 185.09 220.43 19%

5 143.40 144.14 1%

Total 668.94 727.97 9%

BANKNOTES PROCESSED BY SORTING SYSTEMS | 2004 - 2005 U: 106 banknotes

Of all banknotes processed, 439 million were deemed fit for recycling, and the remaining 289 millionwere deducted and destroyed with recourse to sorting systems or special-purpose equipment. Theannual destruction rate8 stood thus at 40%, two percentage points above the rate recorded in theprevious year.

Denomination (€) 2004 (%) 2005 (%) ΔΔΔΔΔ 2004-2005 (p.p.)

500 15 11 -4

200 21 17 -4

100 24 24 0

50 20 26 6

20 35 33 -2

10 31 32 1

5 61 72 11

Overall rate 38 40 2

UNFIT RATE | 2004 - 2005 U: 106 banknotes



The circulation of banknotes, year after year, leads to their natural wear and, as a result, to the needto regularly upgrade the rate of replacement of banknotes received from circulation by new banknotes,in order to maintain the overall quality of fiduciary circulation within the levels recommended by theEurosystem. This explains the unfit rates attained and their development from the previous year.

Due to the structure of circulation in Portugal, banknotes of lower denominations (€5, €10 and €20)show a higher degree of deterioration vis-à-vis higher denominations, which implies higherdestruction rates applicable to the respective sorting processes.

With the purpose of analysing the quality of banknotes in circulation in the Eurosystem, the EuropeanCentral Bank supported their technical assessment. The tests are made with samples of banknoteswithdrawn from circulation in all euro area countries, ranging between €5 and €50. In the Portuguesesample, data for 2005 clearly indicate that the denominations under analysis are considered to beof good quality vis-à-vis the average in euro area countries.

Detection of counterfeit banknotes

The number of counterfeit banknotes detected in Portugal during 2005 decreased significantly fromthe previous year by around 30%.

When compared with the latest figures computed for banknotes denominated in escudos(17,533 counterfeit banknotes seized in 2001), euro counterfeits are still much lower, which is actuallydue to the difficulty in counterfeiting euro banknotes.

In Portugal, the denomination registering the highest number of detected counterfeits is the €50banknote (47% of the total). The same applies in the euro area countries as a whole.

However, even though the quality of certaincounterfeit banknotes reveals some quality, thesecan still be identified without recourse to auxiliaryequipment, i.e. only a careful observation isneeded.

In order to improve the familiarity of bothprofessional operators and the general publicwith authentic banknotes, Banco de Portugaldeveloped specific initiatives, chiefly centred onpreparing information and training material, inparticular the Informação Trimestral do CentroNacional das Contrafacções (QuarterlyInformation of the National Counterfeit Centre)and Avisos de Contrafacção (CounterfeitNotices). These two publications are exclusively addressed to professionals. Soon, Banco dePortugal will also publish a Booklet on Banknotes and Coins, addressed to the general public.

Following the policy started in 2004, Banco de Portugal developed 53 training courses at the nationallevel, totalling 1,168 hours, targeted at professional users (467), in their majority training personneland credit institutions’ cash handlers. At the international level, the Bank developed co-operationinitiatives addressed at the Central Banks of Angola and Cape Verde, also in the field of traininginvolving acquaintance with the banknotes.

In parallel, an internal training project was developed, involving staff of the Bank’s Regional Networkselected for the purpose, with a view to their preparation to act as privileged counterparties in localcommunities, both in the dissemination of the euro banknote and in monitoring training activitiescovering its characteristics.

Quantity

500 32

200 225

100 1,869

50 4,700

20 2,206

10 823

5 208

Total 10,063

COUNTERFEIT BANKNOTES DETECTED IN 2005 U: banknotes

Denomination (€)



Policy actions defined by the Eurosystem

At the Eurosystem level, 2005 was chiefly marked by the development of procedures intended toimplement the “Quadro comum para a detecção de contrafacções e para a escolha e verificação daqualidade das notas de euro pelas instituições de crédito e outros profissionais que operam comnumerário” (“Common framework for the detection of counterfeits and fitness sorting by creditinstitutions and other professional cash handlers”),9 approved by the Governing Council of the ECBin December 2004.

This common framework aims at the implementation of specific standards in euro banknote handlingby credit institutions and other entities professionally engaged in cash handling, namely cash-in--transit companies, in order to ensure the maintenance of the banknotes’ authenticity and quality.

The implementation of the “Common Framework for Recycling”10 implies that national central banksshall compulsorily test the banknote processing equipment operated by third parties, and shallmonitor their smooth operation in loco, as had been the case with automated cash-recyclingmachines and cash-deposit machines. A wider range of machines liable to be tested, however, isnow covered.

Therefore, a number of instruments were designed and approved, targeted at the operationalimplementation of the “Common Framework for Recycling”, inter alia: the respective manual ofprocedures; regulations applicable to the tests to be made to banknote authentication devices; theregular data reporting by third parties to central banks; and the website for publication of the resultsof the tests to the equipment.

At the national level, the intervention of Banco de Portugal in the context of the implementation of the“Common Framework for Recycling” was developed at three levels. With a view to the publication of theabove-mentioned Framework, the bank informed the banking sector, through Circular Letter no. 9/2005/DETof 17 March, of the new rules applicable to cash recycling outside the central bank. Cumulatively, and inorder to meet the absence of legislation on recycling-related issues at the national level, studies weredeveloped by Banco de Portugal, aimed at creating a regulation for the transposition of the above-mentionedcommon framework into national legislation, which is presently being concluded. Finally, Banco dePortugal created the Working Group for Cash Recycling, which comprises, in addition to representativesof credit institutions, members appointed by cash-in-transit companies operating in Portugal, whose mainobjective is to monitor the national implementation of the above-mentioned common framework.

The project for the creation of a new and improved series of euro banknotes was developed in 2005, afterthe approval by the Governing Council of the European Central Bank of an overall development plan. Thefirst stage has already been started, with the development of control procedures for the operational andtechnical requirements to be included in this series. Banco de Portugal has participated actively in theworks, integrating several technical project teams.

In effect, it is to be expected that the first banknote of the new series may be issued by the end of this decade.The issuing sequence of the different denominations depends on the progress attained in terms ofinnovation of the safety features, as well as on the developments of counterfeiting. Nevertheless, it hasbeen decided to maintain the present denomination structure of euro banknotes, and their design willmaintain the theme of the series presently in circulation, i.e., “Ages and styles”. In fact, an increment isexpected in the quality of the banknotes as well as on their resilience to counterfeiting.

(9) Hereinafter referred to as “Common Framework for Recycling”.(10) Euro banknote recycling shall mean a number of operations related to testing the authenticity and quality of the euro banknotes received from the public, with

a view to ensuring that recycled banknotes are genuine and reveal quality levels meeting the patterns adopted at the Eurosystem level.



8.2.2. Metal coins

Circulation

The circulation of metal coins was continuouslyabove the level recorded as at 31 December 2001,as expected. The upward trend with a cleardeceleration observed in 2004 was confirmed andstrengthened in 2005. At the end of the year, thevalue of coins in circulation (including current andcollector coins) stood at €429 million,corresponding to 1,534 million coins. Comparedto the previous year, there was a moderateincrease in circulation (+3.4%), corresponding to€14 million (+136 million coins).

The breakdown of circulation at end-2005, takingonly into account circulation coins,11 was asfollows:

(11) Called “change coins” or “current coins”.

DEVELOPMENTS IN THE VALUE OF METAL COINS IN CIRCULATION | 2005

Quantity Value Weight Quantity Value Weight Quantity Value

2.00 49.50 99 28.6 46.54 93 26.1 -2.96 -6

1.00 124.16 124 35.8 132.79 133 37.3 8.63 9

0.50 116.79 58 16.8 120.59 60 16.9 3.80 2

0.20 145.90 29 8.4 150.37 30 8.4 4.48 1

0.10 158.81 16 4.6 177.05 18 5.0 18.24 2

0.05 238.63 12 3.4 266.94 13 3.7 28.31 1

0.02 257.17 5 1.5 280.74 6 1.6 23.57 0

0.01 298.02 3 0.9 350.09 4 1.0 52.07 1

Total 1,388.98 347 100.0 1,525.13 356 100.0 136.15 10

DEVELOPMENTS IN CIRCULATION | 2004-2005

2004 2005 ΔΔΔΔΔ 2004-2005 (p.p.)

U: 106 coins 106 EUR

Denomination (€)

(value)% (value)%



Growth of current coins’ circulation did not exceed2.8% in value terms, standing below growth incoins in circulation as a whole.

Deposits and withdrawals of coins

Contrary to banknotes, intra-annual developments indeposits and withdrawals of current coins continuenot to show a clear pattern.

In 2005, the highest deposits were recorded inMay and December with €8.4 and €4.8 millionrespectively. The annual amount of these depositsreached €34 million, 2 million more than in 2004.

Withdrawals increased from February to August,attaining in this latter month €5.1 million, decreasedsubsequently (in September and October),and reached a new growth peak in November(€4.7 million). The annual amount of thesewithdrawals stood at approximately €31 million,€15 million less than in 2004. This significantreduction can also indicate a relative “market”saturation, which only the future can confirm.

The coin reception, treatment and distributioncentre continued to operate in the Castelo BrancoAgency, and was extended to the Faro and FunchalAgencies.

A Commission Recommendation (2005/504/EC)was approved on 27 May 2005 concerning

authentication of euro coins and handling of euro coins unfit for circulation. This Recommendationdefines the common procedures to be met in euro coin sorting and authentication operations, basedon the need to ensure the detection and withdrawal from circulation of counterfeit coins and,simultaneously, to establish common rules for national authorities to handle and reimburse genuinecoins which are unfit for circulation. With a view to the transposition of this Recommendation intonational legislation, the Ministry of Finance created a working group integrating, in addition tomembers of that Ministry, representatives of Banco de Portugal, of Imprensa Nacional Casa da Moeda(INCM) (the Portuguese Mint) and of Polícia Judiciária (Criminal Investigation Police).

BREAKDOWN OF METAL COINS IN CIRCULATION | Value 2005

DEVELOPMENTS IN WITHDRAWALS AND DEPOSITS OF CIRCULATIONCOINS | 2005



(12) Designation adopted in the Eurosystem for the coins that in Portugal were previously called “commemorative” and that are characterised by different facevalues, sizes and themes than those of coins for circulation (current). These coins only have legal tender in the issuing country.

Series Theme Value (EUR) Alloy

VI International Ibero-American series Porto Cathedralon Architecture and Monuments

– 20th anniversary of the accession of Portugalto the European Community 10 silver

– World Football Championship

– 60th anniversary of the end of World War II 8 silver

World Heritage classified by Batalha monasteryUNESCO in Portugal

Historical Centre of Angra do Heroísmo 5 silver

– 8th Centenary of Pedro Hispanos birth silver | gold

Collector coins

In 2005, Banco de Portugal put into circulation the following collector coins:12

Issued by the State

For circulation

Copper-covered steel1 cent 3,500,949.48 77,334.60 3,578,284.08

2 cent 5,614,895.14 154,301.02 5,769,196.165 cent 13,347,134.15 386,206.25 13,733,340.40

Nordic gold10 cent 17,704,861.60 628,179.20 18,333,040.8020 cent 30,074,710.60 2,442,970.60 32,517,681.2050 cent 60,293,942.00 5,710,061.00 66,004,003.00

Nickel brass / Copper-nickel1 euro 132,793,010.00 8,801,773.00 141,594,783.002 euro 93,080,930.00 17,068,536.00 110,149,466.00

Total 356.410.432.97 35.269.361.67 391.679.794.64

Collector

Gold

5 euro 20,000.00 0.00 20 000.008 euro 148,440.00 0.00 148 440.00

Silver

5 euro 5,467,545.00 656,880.00 6 124 425.008 euro 60,652,752.00 2,589,288.00 63 242 040.00

10 euro 6,410,880.00 393,620.00 6 804 500.00

Total 72,699,617.00 3,639,788.00 76,339,405.00

GRAND TOTAL 429,110,049.97 38,909,149.67 468,019,199.64

STATUS OF EURO COINS ISSUED AS AT 31.12.05 U: EUR

In CirculationCoins in EUROIn the vaults of

Banco de Portugal Total



8.3. Payment systems

2005 was characterised by developments in the TARGET2 and SEPA (Single Euro Payments Area)projects, which will be essential for the construction of the future European payments area. Theseprojects, albeit with different scopes – TARGET2 focuses on large-value payments and SEPA on retailpayments –, have a very similar objective: making pan-European payments as efficient, safe and easyas payments made through the present EU national systems.

TARGET2, which evolved from the current TARGET system – in operation since the introduction of theeuro in January 1999 – is aimed at remaining the main integration instrument for European moneyand financial markets, but through a more consolidated model, based on a Single Shared Platform(SSP). Although initially TARGET2 was scheduled to go live in January 2007, the currently plannedstart date is November 2007, and Portugal will start to use the platform in the second of the threemigration windows, i.e. in February 2008.

The SEPA project, led by the European banking industry, has a wider scope than TARGET2. In additionto consolidating retail payment infrastructures, it aims at making the use of payment instruments –in particular for credit transfers, card transactions and direct debits – as harmonised as possible, soas to eliminate the current differences between their use at the domestic and pan-European levels.

This project has two milestones: the year 2008, when citizens and companies will start using the firstpan-European payment instruments; and the year 2010, when changes in the infrastructures,allowing the processing of these pan-European instruments, will ensure their interoperability.

Regarding practical achievements, and in terms of TARGET2, the finalisation of the User DetailedFunctional Specifications will make it possible for European banking communities to prepare wellin advance their links to the SSP and to be ready for the user testing starting in the second quarterof 2007. In terms of the SEPA, special mention should be made to the delivery of the SEPA credittransfer and direct debit Rulebooks, as well as to the SEPA Cards Framework. These core documents,which were approved by the European Payments Council (EPC) in their initial version, but are stillbeing refined, will be finalised during the first months of 2006.

European public authorities – in particular the European Commission and the Eurosystem – follow(and the Eurosystem manages the TARGET2 project) these developments with great interest andseek, through coordinated action, that the programmed objectives are reached in a timely manner.

In this context, the Eurosystem has promoted meetings with users and/or their representatives, inorder to ascertain the benefits expected by such entities regarding these two large European projectsand encouraging them, particularly with regard to SEPA, to actively co-operate in their construction.

Periodically, the Eurosystem publishes progress reports where, in addition to assessing the statusof development of both projects, it gives recommendations and guidelines that, particularly withregard to SEPA, help keeping the project on the right track and within the agreed schedules.

The European Commission has been preparing a New Legal Framework, consistent with the SEPAobjectives, that makes it possible for the European payments area to evolve in a harmonised andbalanced way, promoting efficiency and innovation and ensuring the protection of the interests of allparticipants (namely the banking industry, consumers and companies).

In Portugal, these two large projects in the field of payments systems are monitored by the InterbankCo-ordination Commission for Payment Systems (Portuguese acronym: CISP), which includesBanco de Portugal (as President), Associação Portuguesa de Bancos (Portuguese BankingAssociation), SIBS (interbank services company) and the main banking groups operating in thecountry. The co-ordination structures of CISP (steering committees and expert working groups) aresimilar to those of the groups forming the European Payments Council and the European TARGET



group. The objective is therefore to speed up the transposition into Portugal of objectives and goalsto be met within the framework of these projects. When necessary, extended interbank meetings areheld – in the case of SEPA, with the possible participation of non-banking entities – in order to assessthe ongoing work and to provide all interested parties with relevant information.

At the domestic level, special mention should be made to the publication of two Notices of Banco dePortugal: Notice no. 10/2005, governing payments through bank account debit, amends the existingregulations and covers both the direct debit system and other types of intrabank collections, throughbank account debit; Notice no. 11/2005 updates and improves the general conditions governing theopening and running of deposit accounts.

At the operational framework level, SPGT/TARGET and SICOI (interbank clearing system) (for details,see 8.3.1. and 8.3.2.) recorded the following developments: decrease in volume and in valuesprocessed in SPGT, of 1.9% and 5.4% respectively; increase of 7.5% in volume and 2.8% in valuesprocessed in SICOI.

8.3.1. Gross settlement systems: SPGT/TARGET13

The Portuguese real-time gross settlement system (Sistema de Pagamentos de Grandes Transacções –SPGT), and conversely to the overall growth trend seen up to the previous year, recorded a moderatedecline in 2005, with an overall negative change of 1.9 per cent and 5.4 per cent in volume and valuetraded respectively, as illustrated in the table below:

Domestic transactions maintained their growth trend, albeit reduced, of 0.9 per cent in volume and1.2 per cent in value traded.

Regarding cross-border flows, the downward trend observed in the previous year in terms of volumestraded became more marked, with an overall negative change of 5.3 per cent and 7.6 per cent in volume

(13) The Settlement System for Other Depositors (Portuguese acronym: SLOD) processed 52,093 transactions, to an approximate amount of €70 billion,accounting for a growth rate of 5.5% of the volume of transactions and a decrease of 20.3% in value traded. As regards gross settlement systems as a whole(SPGT and SLOD), it represented 3.7 per cent of the volume and 1.3 per cent of the value traded.

Volume Value Volume Value Volume % Value %

Total transactions settled 1,373,971 5,636,475 1,347,269 5,332,398 -26,702 -1.9 -304,077 -5.4

• Domestic transactions 750,917 1,404,002 757,384 1,420,400 6,467 0.9 16,398 1.2

• Cross-border transactions 623,054 4,232,473 589,885 3,911,998 -33,169 -5.3 -320,475 -7.6

– Sent 305,511 2,119,870 276,250 1,958,112 -29,261 -9.6 -161,758 -7.6

– Received 317,543 2,112,603 313,635 1,953,886 -3,908 -1.2 -158,717 -7.5

Daily averages (total transactions) 5,305 21,763 5,242 20,749 -63 -1.2 -1,014 -4.7

• Domestic transactions 2,899 5,421 2,947 5,527 48 1.7 106 2.0

• Cross-border transactions 2,406 16,342 2,295 15,222 -111 -4.6 -1,120 -6.9

– Sent 1,180 8,185 1,075 7,619 -105 -8.9 -566 -6.9

– Received 1,226 8,157 1,220 7,603 -6 -0.5 -554 -6.8

OPERATIONS PROCESSED VIA SPGT

2004 2005 Change

Value: EUR milllionVolume: million



and value traded respectively. The change in behaviour of participants in the SPGT, particularly thoseintegrated in European financial groups, due to the centralised payment processing and the deviationof traffic to other systems, explains the decrease in both sent and received cross-border payments.

With regard to the service level provided, 2005 was characterised by some stabilisation of the technicalinfrastructures. Only some adjustments were made, in terms of upgrades to the SWIFT platform andof the infrastructure configuration of the central information system of Banco de Portugal, which hada positive impact on the average processing time per transaction. However, in 2005 and in terms ofthe operation of SPGT, there were some incidents in the domestic network (as a rule, these werelimited to the real-time communication circuits BP/SIBS and BP/Interbolsa), which were overcomeby activating the emergency alternative channels.

As regards the TARGET/Interlinking segment, the average service availability indicator of SPGTincreased from 99.86 per cent in 2004 to 99.97 per cent in 2005, with the occurrence of a single incidentwith an interruption in the settlement service. The TARGET overall average availability indicatorcontinued to record positive developments, moving from 99.81 per cent to 99.83 per cent.

In the context of incident management, regular contingency tests were carried out at both the domesticand cross-border levels. Therefore, at the domestic level two simulation exercises on the BusinessContinuity Plan/Disaster Recovery Plan activation were carried out, with the SPGT completing two fulldays of operation at the Disaster Recovery Centre. Participants in SPGT, on the other hand, testedthe activation procedures of alternative communication channels for transfer orders, via SWIFT andfax. At the cross-border level, live tests were carried out to the national central banks’ capacity toprocess critical contingency payments (particularly those regarding the EBA and CLS systems).

Moreover, and still with regard to the management of potentially serious crises or contingencysituations, an agreement in principle was reached between BP and SWIFT for an enhanced supportservice. At the same time, and in a context of financial crises with potential systemic impact, activitiesaiming at improving BP’s responsiveness have been developed in this field.

With regard to system developments, the financial settlement of operations having their origin in thePEXSettle system began in May 2005, and an agreement was reached between Banco de Portugaland OMIClear regarding the financial settlement model for operations contracted in the IberianElectricity Market, which shall be implemented in due course.

At the cross-border level, the Narodowy Bank Polski’s RTGS system (SORBNETeuro) was connectedto TARGET/Interlinking on 7 March 2005 and the TARGET Guideline and its annexes were updated.These amendments were basically intended to restructure/simplify the formal organisation anddocumentation of TARGET as a whole (by which the specific national regulations must abide).

In 2005, in the European context, detailed specification works of TARGET2 were developed within theframework of a number of Eurosystem working groups, in dialogue with European banking groupsand relevant representative associations. The work focused mainly on technical interfaces, pricingpolicies, service level agreements and project plans. Particularly relevant was the production ofseveral versions of the User Detailed Functional Specifications (UDFS).

All documentation and aspects relevant to TARGET2 have been made available on the EuropeanCentral Bank website – TARGET2 website – as from the end of the first quarter of 2005. Specialmention should also be made to the publication, in early June, of the 1st version of the NationalMigration Profiles for TARGET2, which was subsequently updated. Moreover, on 8 February and 21October the First and Second Progress Reports on TARGET2 were published, focusing on aspectsregarding the expected service, pricing framework and migration, whose dates were defined in theSecond Progress Report and disclosed by the Eurosystem in September 2005, on the occasion ofthe SIBOS conference. In August, brochures and other additional information on the TARGET2 project



were also published (standard presentations, XML formats, etc.). In this field, stress should also belaid on the revision of the overall project planning for TARGET2, whose launch is projected for 19November 2007 (1st migration window), 18 February 2008 (2nd migration window, where Portugal isincluded) and 19 May 2008 (3rd migration window). An additional window is also projected, forcontingency situations, scheduled for 15 September 2008.

At the national level, meetings were held with the SPGT Pilot Group, where a minimum number ofchanges in the current SPGT system were agreed to be made during the 1st connection stage toTARGET2 (basically envisaging the inclusion of SWIFT message fields, which to date are non-existentin the cross-border payment formats). Subsequently, the group defined a reference time horizon forthe development of the 1st connection stage and highlighted the need for a strategic definition by thevarious Portuguese institutions, which would lead to the setting of the more adequate date for thelaunch of the so-called 2nd connection stage. This stage will imply a “big bang” in terms of the nationalaccession to TARGET2/SSP of all participants and settlement systems. Following CISP meetings,a TARGET2 Interbank Working Group was specifically set up, in order to assess and propose thescenarios – on the basis of co-operative solutions – for the 2nd connection stage of the Portuguesebanking community to TARGET2.

8.3.2. Interbank clearing system (SICOI)

In 2005 the Interbank Clearing System (SICOI) recorded an increase of around 7.5% in the volumeof operations cleared and a rise of around 2.8% in value, as can be clearly seen in the table below:

The 7.5% increase in the volume of cleared operations was due to growth in the Direct Debit, InterbankElectronic Transfer (TEI) and Multibanco subsystems. Conversely, the Cheques and Bills of exchangesubsystems recorded a decrease in cleared operations in both volume and value.

The Direct Debit System (Portuguese acronym: SDD) recorded the highest growth rates (in volumeand value, i.e. 232.1% and 85.6% respectively), although somewhat lower than in 2004, exceedingthe relative weight of TEI in 2005 (around 3.3%), albeit still accounting for a low percentage vis-à-visthe total volume of operations processed in SICOI (approximately 4.6%). In 2006 a slight slowdownin the pace of growth is expected, given that many of the major public utility companies (telephoneand electricity) already use this subsystem. However, a very significant number of collections are stillmade using alternative means to SDD, but they are in objective conditions to migrate to this moreefficient collection system.

Volume Value Volume Value Volume % Value %

Total Cleared 1,413.6 308,427 1,519.9 317,144 106,3 7.5 8,716 2.8

Cheques 188.0 191,193 172.4 183,833 -15,6 -8.3 -7,360 -3.8

Bills of exchange 0.9 2,657 0.5 2,388 -0,4 -41.9 -269 -10.1

TEI 44.6 60,145 49.5 67,069 4,9 11.1 6,924 11.5

Direct Debit 20.8 4,505 69.1 8,360 48,3 232.1 3,855 85.6

Multibanco 1,159.4 49,927 1,228.5 55,494 69,1 6.0 5,567 11.2

OPERATIONS PROCESSED VIA SICOI

2004 2005 Change

Value: EUR millionVolume: million



In 2005 the number of cleared cheques and bills of exchange continued to fall, by 8.3% and 41.9%respectively, thus reinforcing the trend towards the use of electronic payment instruments, to thedetriment of paper-based instruments. In the case of bills of exchange, the sharp fall continued to bedue to the migration of collections to the Direct Debit subsystem, pursuant to Notice no. 10/2003 of17 September.

As to “cheques”, it should be noted that this payment instrument, in value terms, accounts for around58% of amounts cleared in SICOI (excluding cheques above €100 thousand, which are subject togross settlement and whose value reached 62% of cheques cleared in SICOI). In volume terms,cheques only account for 11%, while 15 years ago they represented more than 80%.

Returned cheques, which accounted for around 0.7% of cheques cleared, recorded a decrease inboth volume (around 9.0%) and value (3.2%). The most common reason for cheque returns continuesto be “lack of or insufficient funds” (around 79.8% of the cases).

With regard to the promotion of the smooth operation of the retail payment systems, 2005 was markedby a further migration to SDD – which operates on an interbank basis – of previous intrabank payments,forcing creditors to open accounts with their customers’ banks for the respective debits. Amendmentsto Notice no. 10/2005 of 8 June also contributed to the consolidation of SDD (see 8.3.3 below).

8.3.3. Regulation and control of means of payment

In the course of 2005 the number of requests for approval of new cheque models declined comparedwith the previous year: from 37 in 2004 to 8 in 2005. This was predictable given that the models adoptedby credit institutions are stabilised, since they have to comply with the requirements of the Instructionof Banco de Portugal no. 26/2003 (Technical Rule on Cheques) concerning the circulation of chequeimages project.

The legal system governing the uncovered cheque, approved by Decree-Law no. 454/91 of 28December, was amended by Law no. 48/2005 of 29 August, which entered into force on 29 September.The main amendment consisted in an increase from €62.35 to €150 in the amount that creditinstitutions are obliged to pay regarding cheques whose payer’s account has not sufficient funds;however, it is still early to assess the possible impact of this measure on the restriction to use cheques.In 2005 there was a slight decline in the number of natural and legal persons included in the list ofcheque defaulters (76,078, i.e. 6% less than in the previous year: 80,795) and in the number of thosethat on 31 December 2005 were included in this list: 116,665 (i.e. 11% less than a year earlier:130,633). The number of entities that were removed from the list throughout 2005 was 90,046 (i.e.2% more than in 2004: 88,365), as a consequence of the Bank having decided on a removal from thelist, on account of circumstances deemed to justify the use of cheques (in 17,209 cases, 9% less thanin 2004), but mainly due to the termination of the maximum two-year permanence period (64,437).There was also a decline in the number of annulments from the list due to an oversight or evidenceof the unawareness of the co-holders of accounts whose cheques were the object of user restriction,thus refuting the legal assumption that these co-holders were aware of ill use by the accountco-holder(s) who signed the cheque (from 8,427 in 2004 to 7,828 in 2005).

As of the second half of 2005 the Bank’s regional agency network, comprising the Oporto branch, tworegional delegations in Ponta Delgada and Funchal and seven agencies in Braga, Castelo Branco,Coimbra, Évora, Faro, Vila Real and Viseu, may assess requests for information and removal//annulment from the list of cheque defaulters via an application based on a network infrastructure forthe Bank as a whole. This infrastructure is already used at the head office, in order to shorten requestassessment times and the periods of circulation of documents, among other advantages. The Bankhas fulfilled the tasks conferred upon it regarding the restriction of the use of cheques in a



decentralised but uniform manner, having created – and also updated according to the relevantinformation application – for that purpose a series of operational guidelines and providing publicinformation desks at all the above mentioned locations.

Through Notice of Banco de Portugal no. 11/2005 of 13 July the conditions for the face-to-face andnon-face-to-face opening of bank accounts were revised, namely regarding the due diligence dutiesin the compilation and verification of the identification of account holders and of the documentsproviding proof of representative powers and adapting this regime to regulations on the preventionof money laundering. The opening of bank deposit accounts is a rather important operation, giventhat it often represents the beginning of a lasting business relationship between a customer and acredit institution, and it acts as the support for an indeterminate number of debit and credit financialflows linked to payment systems, means and instruments, such as interbank (direct debit system)and intrabank payments through account debit, credit transfers, bank cards, cheques and domiciledbills and receipts. With the entry into force on 20 October of this Notice, Instruction no. 48/96, whichregulated this area, was revoked.

Given the need to assess the adequacy of contract clauses regarding the use of bank cards to Noticeno. 11/2001, an overall survey of the general conditions for the use of cards adopted by major issuinginstitutions was made and, in co-operation with the banking system, a minimum standard wasprepared or model clauses were recommended, and texts were reworded so as to make them morereadily understandable. This is, however, a payment instrument whose operation is particularlycomplex, on which Banco de Portugal Booklet no. 6 had already focused in 2004.

In 2005 Banco de Portugal continued to be concerned with the supply of information to consumersof financial services, which translated into increased contacts with Centro de Arbitragem de Conflitosde Consumo de Lisboa (Lisbon centre for the arbitration of consumer disputes), namely through theorganisation of information sessions on the operation of the main payment instruments for the legalexperts working in this centre and the exchange of knowledge regarding the rights and duties of partiesin the context of the main issues giving rise to conflicts between the users of services and theirproviders.

Adjustments were made to the legal system governing payments through bank account debit, namelywith regard to: the reformulation of the concept “direct debit”, given the possibility for an interventionby entities representing creditors during the collection process; the extension of the period debtorshave to annul a debit already made; regulations on the cancellation of authorisations on which thereare no debit instructions; the promotion of paperless authorisations, due to the obvious difficulty inmanaging, maintaining and filing the high number of authorisations; and, also, the need to clarify theframework for the intervention of creditors or their representatives aggregating several payments ina single processing. The above-mentioned aspects were transposed into Notice no. 10/2005 of 8June, which amended Notices no. 1/2002 and no. 10/2003 governing interbank and intrabankpayments respectively.

In 2005, by virtue of Instruction no. 5/2005, published on 15 March, a slight change was introducedin Annex II (clearing scheme) of Instruction no. 115/96 (Regulation on large-value payment systems)so as to conform to Guideline ECB/2005/1 on TARGET, in order to determine responsibilities relatingto the provision of cross-border payment processing services through TARGET between a participatingcentral bank and a non-participating central bank, using a bilateral link.

In 2005 different versions of Community draft legislation were also analysed, aimed at theimplementation of a New Legal Framework for Payments in the Internal Market, through a Directive,whose transposition into Portuguese law will imply, as early as possible, a revision of the legislationand regulations in force.



8.4. Monetary policy operations and management of the European Central Banks’foreign reserves

8.4.1. Implementation of the single monetary policy

In 2005 the operational framework for the implementation of the Eurosystem’s monetary policyremained stable, allowing for the consolidation of the changes introduced in 2004. In fact, the newoperational framework seems to have contributed to the stability and concentration of the demandin tenders, as well as to an increased predictability of tender results, which in turn led to the greaterstability of money market conditions, as envisaged with the changes introduced. Thus, the operationalframework continued to perform in a globally efficient manner, ensuring stable short-term moneymarket interest rates and clearly signalling the stance of the ECB’s monetary policy.

In the first few months of 2005, economic recovery in the euro area continued at a moderate pace,with high and volatile oil prices, and also with the persistence of global imbalances, whichrepresented risks to economic growth. During this period, the Governing Council of the ECB remainedstrongly vigilant with regard to developments in inflationary risks over the medium term, but remainedconfident about the consolidation of economic recovery in the course of 2005, supported by historicallylow interest rate levels. However, in the second quarter of the year, this scenario changed slightly anduncertainty about the buoyancy of the euro area economy led to the emergence of expectations thatthe ECB might lower its key interest rates. Nevertheless, this sentiment was short-lived and despitethe signs of a deceleration in economic activity, the ECB always considered that economic growthwould improve gradually throughout the year. Indeed, economic activity in the euro area gained somemomentum in the third quarter of the year, although the high oil prices continued to affect negativelyeconomic agents’ demand and confidence. Although according to the ECB there was no significantevidence that stronger inflationary pressures were building up in the euro area, year-on-year inflationrates remained at levels above 2 per cent. In parallel, the acceleration of the growth pace of moneysupply and of credit to the private sector led the Governing Council to increase its vigilance with regardto the materialisation of inflationary risks resulting from the abundant liquidity. In the last months of2005, the rise in energy prices drove the year-on-year inflation rate to levels well above 2 per cent. Inthis context, in view of the upward risks to medium-term price stability, which is the primary objectiveof the ECB, the Governing Council decided to increase the key ECB interest rates.

Therefore, after a period of approximately two and a half years in which the key ECB interest ratesremained broadly unchanged, the Governing Council, at its meeting on 1 December, decided toincrease these rates by 25 basis points. Thus, the minimum bid rate on the main refinancingoperations (MROs) of the Eurosystem was set at 2.25 per cent and the interest rates on the marginallending facility and the deposit facility were increased to 3.25 per cent and 1.25 per cent respectively.

At the end of 2005, following a statement by the President of the ECB after the Governing Councilmeeting of 18 November, strong expectations emerged that the ECB might increase its key interestrates in December. Thus, it was possible to test, to some extent, one of the objectives of the newoperational framework, i.e. the achievement of higher stability of short-term interest rates and theminimisation of the impact of a change in expectations regarding the key ECB interest rates on theMROs, during the reserve maintenance period. However and somewhat unexpectedly, very short-term interest rates increased markedly in the days after the meeting held on 18 November, remainingat high levels until the date of the last MRO of the reserve maintenance period, in which the ECBsupplied liquidity above the benchmark allotment.14 Subsequently, interest rates fell to levels more

(14) Benchmark allotment is the allotment normally required to establish balanced liquidity conditions. The benchmark allotment started to be disclosed with theimplementation of the new operational framework in March 2004, together with the announcement of the MRO, and it is revised on the allotment day.



closely in line with the current operational framework. Therefore, despite the initial reaction of veryshort-term interest rates, the alignment of the start of the maintenance period with the settlement dayof the MRO, following the Governing Council meeting at which the monthly assessment of themonetary policy stance is scheduled, seems to have helped to avoid significant interference frominterest rate expectations during the reserve maintenance period.

8.4.1.1. Liquidity management

The activities related to the Eurosystem’s liquidity management in 2005 continued to play a pivotal role inthe implementation of the single monetary policy. The forecast of autonomous factors, which coverreserve supply factors that are not under the direct control of the central bank liquidity management,continued to be essential, since the execution of the regular open market operations – in particular thevolume of liquidity to be allotted in MROs and their degree of effectiveness – relies on the correctassessment of the liquidity needs of the euro area banking system.

In 2005 the daily liquidity needs of the euro area banking system amounted to €377 billion on average,representing an increase of 21 per cent compared with 2004. The behaviour of the autonomousfactors continued to strongly condition developments in euro area liquidity needs. On average,autonomous factors contributed €234 billion to the interbank liquidity deficit of the Eurosystem, i.e.€57 billion more than in 2004. The upward trend of liquidity needs stemming from the autonomousfactors was largely due to the strong rise in banknotes in circulation, which on average absorbed€69 billion more than in 2004. In fact, in 2005 the increase in banknotes in circulation remained robust,although the year-on-year growth rate of the average monthly value of banknotes in circulation sloweddown in the course of the year, from 16.5 per cent in January to 13.5 per cent in December, which isstill a relatively high figure.

Reserve requirements, which are the other main source of the Eurosystem’s liquidity needs,increased by approximately 7 per cent, to an annual average level of €146 billion.

The quality of forecasts regarding the autonomous factors remained high in 2005, leading the liquidityprovided in the interbank market through regular refinancing operations, in particular through MROs,to be globally adequate to meet the liquidity needs of the euro area banking system. However, thequality of forecasts regarding the autonomous factors in 2005 deteriorated slightly compared with theprevious year. The difference between the actual figure recorded by autonomous factors and theforecast published on the allotment day of the MRO recorded a mean absolute error of €0.9 billion,compared with €0.7 billion in 2004.

In Portugal, the excess liquidity that had characterised the banking system vanished progressivelyin the course of the year. In fact, the average excess liquidity, which reached approximately €2.6 billionin 2004, decreased to €959 million in 2005. At the end of 2005, the Portuguese banking system wasin a liquidity deficit situation. Like in the past few years, the reduction in excess liquidity in thePortuguese banking system was mainly due to the persistence of the strong growth of the balancesheet item associated with the Capital Share Mechanism (CSM) (asset position offset against the item“Banknotes in circulation”), whose average balance increased by 28 per cent, to around €7 billion.Contrasting with the situation at Eurosystem level, in 2005 autonomous factors (excluding theintra-Eurosystem component) continued to account for the supply of liquidity to the banking system,albeit to a lower amount than in 2004. On average, autonomous factors totalled €3,3 billion, compared with€-4.8 billion in 2004. In Portugal, developments in the autonomous factors resulted chiefly from thedynamics of banknotes in circulation, since changes in the remaining autonomous factors were negligible.On average, the item “Banknotes in circulation” on the balance sheet of Banco de Portugal recorded a 15per cent increase to €11,698 million, chiefly due to the strong growth of the component associated withadjustments resulting from CSM. Between January and December 2005 this component of banknotes in



circulation increased by €1,360 million, while the average amount of “actual banknotes” remainedbroadly unchanged from a year earlier (2003 and 2004 had recorded declines of around 5 per cent).Like in previous years, “IntraEurosystem liabilities” related to operations settled through theTARGET system continued to show a net creditor position of €13.2 billion, on average,compared with €9.3 billion and €7.7 billion in 2004 and 2003 respectively.

8.4.1.2. Open market operations and standing facilities

Overall, the regular liquidity-providing operations covered the liquidity needs of the euro area bankingsystem, with recourse to fine-tuning operations only at the end of some reserve maintenance periods.

In the course of 2005 the expansion of liquidity needs in the euro area led to a rise in the averageoutstanding amount of open market operations by €65.6 billion to approximately €377 billion,representing an increase of 21 per cent compared with 2004. The composition of the outstandingamount remained relatively stable, with MROs accounting for around 77 per cent of the overall liquiditysupplied to credit institutions.

In 2005 the ECB continued to publish each week, on the announcement day and on the allotment dayof MROs, a forecast of the average autonomous factors and the benchmark amount in MROs. In thecourse of the year, the ECB conducted 52 MROs; the average amount allotted in each MRO reached€290 billion, representing a 32 per cent increase compared with 2004. The average outstandingamount of MROs was similar, increasing by €48 billion from 2004. In most tenders, the amountallotted by the ECB coincided with the benchmark allotment, but in some situations, the ECB decidedto allot slightly more than the benchmark. The volatility displayed by the weekly change in liquidity remainedbroadly unchanged from 2004, i.e. at around €10 billion. The average amount of bids in MROs – €369 billion– moved closely in line with developments in the amounts allotted, with the bid cover ratio standingat 1.27 (1.26 in 2004). Although the number of eligible counterparties continued the trend decline ofprevious years, the average number of participants per tender remained virtually unchanged from2004, after the implementation of the new operational framework, totalling 351 counterparties. Withregard to tender rates, the marginal rate showed high stability throughout the year, standing onaverage 5 basis points above the minimum bid rate (2 basis points in 2004). The weighted averageallotment rate moved in line with the marginal rate, standing on average 1 basis point above the latter.This spread remained stable compared with 2004, and its reduced value resulted from the highdegree of accuracy of credit institutions’ forecasts regarding tender results, in particular tender rates.

Turning to longer-term refinancing operations (LTROs), the allotment volume for each operation was€30 billion in 2005 (€5 billion higher than in 2004). This amount was fully allotted in the LTROs carriedout in 2005, except for the operation conducted in December.15 In the course of 2005, the average dailyoutstanding amount of LTROs increased by 25 per cent from 2004, standing at around €88 billionand representing 23 per cent of the total outstanding amount of the Eurosystem’s refinancing. Thisfigure is slightly lower than the benchmark fixed by the ECB for refinancing through LTROs (25 percent).

Developments in demand for LTROs followed the rise in the benchmark amount, having increasedby 23 per cent, on average, to €52.3 billion. As for the tender rates, the marginal rate and the weightedaverage allotment rate moved closely in line with the EUREPO rate16 for the three-month maturity,standing at levels slightly above this market rate. The marginal rate stood, on average, at 2.17 per cent

(15) In December the ECB had to conduct exceptionally two LTROs, to inject in the market the intended amount of €30 billion. This was caused by oneinaccurate bid from one counterparty in the LTRO settled on 22 December. As a result, the liquidity provided in this LTRO reached only €12.5 billion. Thus,the ECB decided to conduct on the following day an exceptional LTRO, with the same characteristics of the regular LTRO and maturing on the same day, inorder to provide the market with the remaining amount, i.e. €17.5 billion.

(16) Benchmark rates for market transactions involving the taking or the provision of liquidity against securities.



and the weighted average allotment rate 1 basis point above the former (2 basis points in 2004). Itshould also be noted that the Governing Council announced on 16 December the allotment amountof €40 billion for each of the LTROs to be conducted in 2006, accounting for a €10 billion increasefrom 2005. This increase in the allotment amount took into consideration that liquidity needs of theeuro area banking system are expected to increase further in 2006 and also because the Eurosystemdecided to increase from 25 per cent to 30 per cent the share of the institutions’ liquidity needs satisfiedby LTROs.

With the implementation of the new operational framework of the Eurosystem’s monetary policy inMarch 2004, there is a higher probability that liquidity imbalances build up after the last MRO of thereserve maintenance period. In this context, at the end of 2004, the ECB announced that it wasavailable to restore balanced liquidity conditions through fine-tuning operations, in particular at theend of reserve maintenance periods. Hence, in 2005 the ECB carried out nine fine-tuning operations,i.e. six more than in 2004; all of them were conducted on the last day of the reserve maintenance period,in order to adjust the liquidity imbalance and to stabilise the shorter-term interest rates. In total, sixliquidity-absorbing and three liquidity-providing operations were carried out. The fine-tuning operationswere conducted in the form of reverse transactions, through quick tenders, with same-day settlementand one-day maturity. Overall, operations were successful and welcome by the market, having metthe intended objectives. Notwithstanding, there were three liquidity-absorbing operations (7 June,12 July and 9 August), through which the ECB was not able to absorb the total amount desired, dueto the lack of interest of the counterparties.

With regard to the behaviour of counterparties resident in Portugal in the regular refinancingoperations, there was a significant increase in the average daily outstanding amount of refinancingfrom €2,059 million in 2004, to €5,153 million in 2005. This increase was exclusively due to the risein the average outstanding amount of LTROs, since the average outstanding amount of MROsdeclined by €266 million. Consequently, in terms of structure, the composition of the outstandingamount of refinancing of resident institutions continued to be opposite to that of the Eurosystem, witheven the predominance of the raising of funds through LTROs to the detriment of MROs. In 2005financing through LTROs accounted for around 98 per cent of the total outstanding amount ofrefinancing, compared with 82 per cent in 2004. The number of participants continued to be low inboth types of operation. The average number of participants in MROs decreased from 3 to 1, whilein LTROs it remained at 2. Like in the previous year, counterparties resident in Portugal did not submitany bids in the fine-tuning operations conducted in 2005.

In 2005 the recourse to the Eurosystem’s standing facilities decreased further. The average dailyrecourse to the marginal lending facility amounted to €106 million and to the deposit facility totalled€122 million. The decline in the recourse to the marginal lending facility was more marked than inthe deposit facility, triggering a reversal of importance of these two types of standing facilities. Thelower recourse to the standing facilities of the Eurosystem reflected, on the one hand, the high degreeof efficiency of the interbank money market and, on the other, the smaller liquidity imbalances on thelast day of the reserve maintenance periods, resulting from the higher frequency of fine-tuningoperations, on this day, in the course of 2005. Like in the previous years, the use of standing facilitiesby counterparties resident in Portugal continued to be rather limited, being only observed in the depositfacility on the last day of the reserve maintenance period. The placement of funds in the deposit facilityincreased slightly from 2004, totalling €407 million (this amount results from the cumulative valueof recourses at the end of nine reserve maintenance periods).



8.4.1.3. Euro money market

The functioning of the euro money market in 2005 was pursued in a context of efficiency and stability inliquidity conditions.

At the beginning of 2005, prospects regarding developments in economic activity and price levelsconfirmed expectations of stability of the key ECB interest rates for a longer period. Thus, moneymarket longer-maturity rates remained virtually unchanged throughout the first quarter of 2005. In thesecond quarter of the year, amid signs of a deceleration in economic activity, expectations emergedof a reduction in the key ECB interest rates. This triggered a downward movement in longer-term ratesuntil the end of the first half-year. During this period, the slope of the money market yield curve turnednegative. From July onwards, market expectations of a reduction in key ECB interest rates subsidedand expectations emerged of an increase in the key ECB interest rates. Longer-term rates in the euromoney market moved in line with this market sentiment, continuing to increase, in particular in thelast quarter of the year, and as a consequence the slope of the yield curve steepened.

At the shorter end of the money market yield curve (up to the one month), interest rates remained stableat around 2.10 per cent until the beginning of November (excluding the overnight maturity at the endof the reserve maintenance periods), in the absence of expectations of a change in the key ECB interestrates over that horizon and amid generally balanced liquidity conditions. As the date of the GoverningCouncil meeting approached, in which this Council decided to raise the key ECB interest rates, moneymarket rates up to one month went up, followed by an increase in volatility, which was more markedin the overnight maturity. On average, the standard deviation of the spread between the EONIA (EuroOvernight Index Average) and the minimum bid rate in MROs stood at 7 basis points, as comparedwith 5 basis points on average in 2004. The EONIA evolution pattern remained unchanged fromprevious years, moving closely in line with the marginal interest rate of MROs and exhibiting highervolatility at the end of the maintenance periods and at month-ends. The EONIA daily average turnoverincreased by 8 per cent compared with 2004, having reached €38 billion. The contribution of theaverage daily turnover of Portugal to EONIA decreased by approximately 19 per cent from theprevious year.

Interbank activity in Portugal regarding unsecured operations carried out through SITEME17 increasedby 9 per cent from 2004, with an average daily turnover of €918 million. Like in previous years, thestructure of transactions by maturity remained stable, and the bulk of the activity was concentratedon the overnight maturity (88 per cent).

8.4.1.4. Minimum reserve system

In Portugal, the liabilities included in the reserve base for the calculation of the minimum reservesof credit institutions in 2005, reached on average €168,897 million at the end of the relevant months.This figure represents an increase of 1.1 per cent compared with the previous year (2.4 per cent in2004). Subject to the application of a reserve ratio of 2 per cent, minimum reserves recorded apercentage rise similar to that of the reserve base (1.1 per cent), with an average monthly value of€3,372 million.

The remaining liabilities also included in the reserve base, but subject to a zero reserve ratio(liabilities with an agreed maturity of over 2 years), reached €67,579 million, i.e. an increase of8.2 per cent (14.6 per cent in 2004).

(17) Market Electronic Transfer System.



The daily value of deposits for minimum reserves purposes, both in Portugal and in the Eurosystem,on average, exhibited lower volatility than in 2004; however, in Portugal the fluctuation level was moremarked than in the Eurosystem, particularly on the first days of the second half of each maintenanceperiod.

The average level of total excess reserves, as a percentage of reserve requirements, increased from2004, both in Portugal (from 0.36 per cent to 0.38 per cent) and in the Eurosystem (from 0.49 per centto 0.51 per cent). Like in previous years, excess reserves in Portugal on average continued to be lowerthan the Eurosystem average, despite the exceptions seen in April, August and September.

In 2005 in Portugal there were eight cases of non-compliance with the minimum reserve obligations,representing an increase from 2004. However, the relative amount of non-compliance remainedunchanged from 2004 (0.001 per cent). At the Eurosystem level, non-compliance with the minimumreserves in 200518 declined compared with 2004, as regards both the number (144 down from 169)and the relative amount (0.003 per cent down from 0.006 per cent).

At the end of 2005, there were 6,248 credit institutions subject to minimum reserve requirements inthe euro area, of which approximately 3 per cent fulfilled the minimum reserves with the Banco dePortugal (of which 61 per cent hold the minimum reserves indirectly through an intermediary). Of thissubgroup, around 18 per cent have access to monetary policy operations, representing a lowerpercentage than for the Eurosystem as a whole.

8.4.1.5. Eligible assets

On 21 February 2005, the ECB published a revised version of the document entitled: “Theimplementation of monetary policy in the euro area: General Documentation on Eurosystem monetarypolicy instruments and procedures”, the so-called “General Documentation”. In addition to otheramendments, this version introduced a number of changes to the eligibility criteria applied to eligibleassets, namely to those concerning the introduction of the first phase of the single list of collateralwithin the Eurosystem monetary policy framework.

The changes mentioned above consisted in the following measures: i) the relaxation of the criterionrequiring debt instruments issued by a credit institution to be awarded an “issue” or “programme”rating, being currently an “issuer” rating sufficient; ii) the implementation of the principles used by theEurosystem to assess the acceptability of non-regulated markets; iii) the introduction into the tier onelist of euro-denominated debt instruments issued by entities established in those Group of Ten (G10)countries that are not part of the European Economic Area (EEA); and iv) the withdrawal of equitiesfrom the tier two lists of eligible assets.

These amendments were implemented on 30 May 2005, with the exception of iii) and iv), whichbecame effective on 1 July and 30 April, respectively.

The impact resulting from the introduction of these measures depended on the amendment itself.The strongest impact resulted from the change in the eligibility criteria applicable to debt instrumentsissued by credit institutions (i). In fact, on 30 May, 12 debt instruments issued by resident creditinstitutions were included in the list of eligible assets by Banco de Portugal.

At the end of 2005, the value of the assets eligible for Eurosystem credit operations, submitted byBanco de Portugal for tier one and tier two lists totalled €84,696 million, representing an increaseof 22 per cent, as compared with the figure recorded on 31 December 2004.

(18) Preliminary data for December.



In terms of structure, the tier one debt instruments continued to represent the majority of the assets(99.96 per cent in terms of the overall outstanding amount).

The observed growth of the overall value of eligible assets submitted by Banco de Portugal can beexplained by the behaviour of the debt securities issued by the “Central Government”, whichoutstanding amount increased by €14,989 million in the course of 2005. This category accountedfor 97.75 per cent of total domestic eligible assets and is comprised of Treasury bills and bondsissued by the Portuguese State.

In monthly average terms, the use of collateral in Eurosystem credit operations by domesticcounterparties amounted to €6,809 million in 2005, accounting for an increase of 87 per cent ascompared with 2004.19

In 2005 the use by domestic counterparties of collateral deposited in international central securitiesdepositories increased strongly (€5,607 million in monthly average terms, i.e., 82.3 per cent of thetotal delivered). For the second consecutive year, the large majority of the assets used was depositedin international central securities depositories (euro area), in particular of securitised debtinstruments (ABS/MBS,20 issued by Special Purpose Vehicles - SPV - located outside the country),which accounted for €5,413 million. In 2004 ABS/MBS had represented 50.1 per cent of the collateraldelivered (€1,823 million in monthly average figures). With regard to this specific type of assets,domestic counterparties used almost exclusively asset-backed securities provided by entitiesestablished in Portugal.

Turning to the analysis by type of issuer, debt instruments issued by “corporate and other issuers”,which include ABS/MBS, were the most widely used collateral, reaching €5,779 million, in monthlyaverage terms, i.e. 84.8 per cent of the total amount delivered.

By contrast, the use of debt instruments issued by the “central government” decreased slightly(despite their increase in the list of eligible assets) from €1,074 million, in 2004, to €986 million inmonthly average terms (14.5 per cent of the total amount delivered). A large share of the debtinstruments issued by the “central government” concerned debt instruments issued by the PortugueseState (90 per cent).

Debt instruments issued by ’credit institutions’ accounted for only 0.6 per cent of total collateral usedby domestic counterparties. Debt instruments used were deposited in international central securitiesdepositories, and securities issued by domestic credit institutions were not used.

In 2005 domestic counterparties used only assets belonging to the tier one list. By contrast, in 2004there was a residual cross-border use of assets, belonging to the tier two list and issued by creditinstitutions.

The participation of Banco de Portugal in the Correspondent Central Banking Model, as the homecentral bank, was similar to its participation as correspondent bank (central bank of the country whereassets used by external counterparties in Eurosystem credit operations are deposited), due to thelarge use by domestic counterparties of assets deposited in international central securitiesdepositories, as mentioned above. In 2005 Banco de Portugal held in custody (on behalf of otherEurosystem central banks) debt instruments amounting to €6,737 million, in monthly average terms(almost exclusively Treasury bills and bonds), representing a decline of 11 per cent compared with2004 (around €7,600 million). The French and German counterparties were those that used morethe assets deposited with national central securities depositories to guarantee Eurosystem creditoperations.

(19) Eurosystem credit operations include monetary policy operations as well as intra-day credit operations.(20) Asset-backed securities/mortgage-backed securities.



8.4.1.6. Review of the Eurosystem collateral framework

Following the announcement, in May 2004, of the decision of the Governing Council on the gradualimplementation of a “single list” within the Eurosystem collateral framework (to replace the currenttwo-tier system of eligible collateral), some measures have already been implemented, referred toin the previous item, aimed at reviewing the Eurosystem’s collateral policy.

Among the decisions of the Governing Council during the past few years on this issue only theinclusion of bank loans in the “single list” of eligible assets is still pending implementation, whichis scheduled to take place on 1 January 2007.

In the course of 2005, important decisions have been taken and made known to the parties concerned,namely as regards the eligibility criteria of bank loans, the framework for the assessment of the creditquality of debtors and the procedures for the use of bank loans by counterparties.

In terms of eligibility, euro-denominated bank loans (including syndicated loans) will be accepted,regulated by the legislation of an euro area Member State and according to which debtors are financialcorporations or general government bodies (as defined in the European System of Accounts, ESA95),as well as loans to international or supranational institutions. In terms of the amounts accepted,in the period from 2007 to 2012, each euro area NCB will determine the threshold above which loanswill be eligible for collateral purposes and as from 2012, a common minimum threshold of€500,000 will be in place.

The Eurosystem Credit Assessment Framework (ECAF) is a set of procedures and rules establishingthe Eurosystem’s requirements that all eligible collateral in the future single list meet high creditstandards to guarantee the principles of consistency, accuracy and comparability among the creditassessment quality (CAQ) sources considered. The ECAF relies on four CQA sources: external creditassessment institutions; internal credit assessment systems of national central banks; counterparties’internal ratings-based (IRB) systems; and third-party providers’ rating tools operated by approvedthird-party operators.

The future ECAF will be underpinned by three core principles:

• consistency: a wide range of credit quality assessment systems must be made available across

the euro area, with consistent results;

• accuracy: the systems must calculate with accuracy the credit risk of the issuers of collateral, of

borrowers, as well as of the guarantors;

• comparability: a mechanism is required to compare and monitor the different systems that are

comprised in the assessment framework.

The Eurosystem’s benchmark for credit risk is defined in terms of a “single A” credit rating.21 Theprobability of default (PD) over one-year horizon will be used for the definition of an eligibilitythreshold and for the monitoring of the systems’ performance. For the credit quality threshold,a value of 0.10 per cent has been considered a fair equivalent to a “single A” default rate. Theeligibility threshold was therefore set at 0.10 per cent, subject to a regular review.

The procedures related to the use of bank loans as collateral will be implemented according tothe national legal and operational framework and will take into consideration the expected volumeof eligible bank loans to be used by the counterparties. Therefore, each national central bank will

(21) That is, the minimum long-term “A-” rating of Fitch or S&P, or the “A3” rating of Moody’s.



put in place local solutions that comply with a set of minimum requirements established atEurosystem level. The cross-border use of bank loans will be possible through the CorrespondentCentral Banking Model.

8.4.2. Management of the European Central Bank (ECB) foreign reserves

The management of the ECB’s foreign reserves is carried out in a decentralised framework by theEurosystem’s NCBs, under an agency agreement and in strict compliance with the rules andguidelines established by the ECB.

At the end of 2005, the Banco de Portugal’s share in the ECB’s foreign reserves amounted to€1,070 million, of which €815 million corresponded to foreign currency assets actively managed byBanco de Portugal, and the remaining €255 million to gold assets.

These figures represent a positive change compared with 2004, partly due to exchange rate and goldprice fluctuations.

In addition to its management tasks, Banco de Portugal continued to actively participate in the relevantECB Committees and Working Groups, which dealt with issues regarding the reserve managementframework, namely concerning research on new instruments, risk control, organizational issues andthe Procedures governing the managers’ action (with the required changes of the Banco de Portugal’sManuals of Operations for ECB’s Reserve Management). In 2005 the preparation of the implementationof the currency specialisation framework, within the decentralised management model was ofparticular relevance. Under this new setup, which was implemented in January 2006, Banco dePortugal is responsible for the management of a Japanese yen portfolio.

8.5. Analysis and research

In the course of 2005 economic analysis and research developed by Banco de Portugal continuedto focus on three main objectives: advice to the Governor of Banco de Portugal in the monetary policydecision-making process within the framework of the Eurosystem; analysis and forecast of thePortuguese economy; analysis and monitoring of financial markets and systems, on both amacroprudential and a microeconomic perspective.

Regarding the advice to the Governor of Banco de Portugal, reference should be made to the regularmonitoring of the euro area economy and its international background, as well as to the issue oftechnical opinions on all relevant matters in monetary policy discussions within the framework of theEurosystem. Banco de Portugal continued to publish estimates and projections for the Portugueseeconomy in the “Economic Bulletin”, and to develop and improve macroeconomic forecasting andmodelling tools. The Bank’s research on the Portuguese economy was published in the “EconomicBulletin” and covered several subjects, such as the monetary policy transmission mechanism, thelabour market, fiscal policy, the interest rate policy, employment in the public sector, the developmentof household wealth, Portuguese exports competitiveness, among other issues under analysis inBanco de Portugal’s publications. Also worthy of note in the Bank’s publications were the papersdedicated to the study of inflation persistence in Portugal.

The “Monthly Economic Indicators” and the “Economic Bulletin” continued to be published accordingto the schedule announced at the end of 2004. As in previous years, in addition to articles of a technicalnature covering several subjects, the “Economic Bulletin” included texts on economic policy andsituation, namely estimates and forecasts for the Portuguese economy and the analysis of thebanking system performance and of the main developments in the foreign exchange and derivatives



market. The results of the “Quarterly Bank Lending Survey” continued to be disclosed in the Bancode Portugal’s website, following the ECB’s disclosure of the corresponding aggregate results for theeuro area.

In 2005, 15 articles were published in the Bank’s Working Papers Series. Some of the research workproduced by the economists of the Economic Research Department were published in refereedinternational scientific journals, with special reference to the “Quarterly Review of Economics andFinance”, “Journal of Labor Economics”, “Empirical Economics”, “Journal of Empirical Finance”,“Journal of Public Economics”, “Journal of the European Economic Association”, “EconomicsLetters”, “Studies in Nonlinear Dynamics & Econometrics” and “International Journal of Forecasting”.The economists of Banco de Portugal presented their works at several international scientificmeetings, namely at the Annual Conferences of the European Economic Association, EuropeanAssociation of Labour Economists/Society for Labor Economics, Society for Economic Dynamics,European Society for Population Economics, ECB Workshop on Monetary Analysis, 25th InternationalSymposium on Forecasting, Bank of Italy Public Finance Conference and International Conferenceon “Empirical Evaluation of Labour Market Programmes”. Economists of Banco de Portugal continuedto be members of the executive committees of several international scientific organisations, such asthe European Economic Association and the European Association of Labour Economists.

Banco de Portugal ensured the institutional reporting and the representation in the Eurosystem’sCommittees and Working Groups on economic analysis and monetary policy issues. In particular,Banco de Portugal participated in the Eurosystem’s spring and autumn projection exercises.Furthermore, Banco de Portugal continued to participate in the Economic Policy Committee of theEuropean Commission and in some of its working groups associated with structural issues, ofinterest to the Portuguese economy.

Banco de Portugal continued to co-operate with national bodies, such as the Ministry of Finance andthe National Statistical Institute (INE), and international organisations, such as the EuropeanCommission, the International Monetary Fund, the Organisation for Economic Co-operation andDevelopment, the Eurostat and the Bank for International Settlements.

Also, the Bank promoted the co-operation with Portuguese and foreign researchers, by hostingseveral conferences, seminars and providing staff training. In the course of the year, 20 externalseminars and 3 short-term training courses took place at Banco de Portugal. In May 2005, theEconomic Research Department of Banco de Portugal organised the Third Labour Market Conference– “Conference on European Labour Markets and Education”, attended by national and foreignrenowned economists. The First Conference on Financial Stability was also organised in 2005, the“Conference on Financial Fragility and Bank Regulation”, which was held in Lisbon in June and wasattended by a number of important members of the international and national academic milieu. Finally,in December, the Department organised, jointly with CEPR, the “Conference on Exchange Rates andCurrencies”.

8.6. Statistics

Inter-action with users

In the field of statistical information, 2005 was characterised by the significant investment made byBanco de Portugal with a view to providing a new web service for the dissemination of relevantstatistics on the Portuguese economy. This investment culminated in the release to the public ofBPstat | Statistics online on the Bank’s website on 19 January 2006. The main purpose of this serviceis to provide easy and quick access to the statistical series compiled by Banco de Portugal as wellas to the main statistics and economic indicators published by other institutions.



This service provides the users with a wide range of functionalities and options for analysing statisticalinformation, in particular:

• Multidimensional analysis of data;

• Design of tailor-made statistical tables;

• Creation of favourites;

• Subscription of alerts on the update of statistical information in the different domains;

• Access to methodological data (metadata) on the series published.

With reference to the “Statistical Bulletin”, special reference should be made to its regular publicationin CD-ROM as of January 2005, making available a number of new functionalities and increasing theportability and availability of statistical information. The “Statistical Bulletin” was published on thescheduled dates, as indicated in the calendar made available on the Internet. In the course of the year,there were relevant improvements in its contents, namely changes in structure and the incorporationof additional data, in particular:

• data on the amounts outstanding of securities issued, broken down by institutional sector and bytype of security;

• new nominal effective exchange rate index for Portugal and two real effective exchange rateindices;22

• statistics based on data from the central credit register, with a view to providing more detailedinformation on credit granted by the resident financial system to the non-financial corporatesector;23

• new statistical tables on national financial accounts: on financial transactions as of June, and onfinancial assets and liabilities end-of-period positions as of November;24

• within the scope of balance of payments statistics, a new table with data on the seasonally adjustedcurrent and capital accounts;25

• statistics on non-financial corporations from the central balance sheet database, including serieson activity, number of employees, profitability and corporations’ assets and liabilities, based onannual and quarterly non-consolidated accounting data for a relevant group of Portuguese non-financial corporations.26

(22) Methodology published in an article of the December 2005 issue of the Economic Bulletin.(23) For more information on the underlying methodology see Supplement to the Statistical Bulletin no. 1/2005.(24) For more information on the underlying methodology see Supplements to the Statistical Bulletin nos. 2/2005 and 3/2005.(25) For more information on the underlying methodology see Supplement to the Statistical Bulletin no. 4/2005.(26) For more information on the underlying methodology see Supplement to the Statistical Bulletin no. 5/2005.



Publication of supplements to the “Statistical Bulletin” and statistical press releases

Five supplements to the “Statistical Bulletin” were published, providing the users with additionalelements intended to support the analysis of the disseminated statistical information:

• A new source for monetary financial statistics: the central credit register;

• National financial accounts for the Portuguese economy. Methodological notes and statisticalresults for 2000-2004;

• National financial accounts for the Portuguese economy. Statistics on financial assets andliabilities for 1999-2004;

• Seasonal adjustment of balance of payments statistics;

• Statistics on non-financial corporations from the central balance sheet database.

In addition, with a view to making new statistical products known to users, a number of statistical pressreleases were published, which, in addition to the general reference to the methodological aspectsdeveloped in the above-mentioned supplements, briefly described the major results obtained.

Reporting to international organisations

As regards the dissemination of statistics to international organisations, 2005 was marked by strictcompliance with the reporting deadlines in the different statistical domains, with no delays registered.790 reports were made to international organisations, in particular to the ECB, EUROSTAT, IMF,OECD, BIS and UNCTAD, totalling around 503 thousand series. In this respect, the following are worthmentioning:

• the beginning of the regular reporting to the ECB of quarterly and annual international investmentposition statistics with a geographical breakdown;

• the revision of financial accounts (transactions and positions) for the 1998-2004 period, which werereported to the Eurostat and the ECB, with special reference to the methodological changes at thelevel of the marking-to-market valuation of the instrument “Shares and other equity”, with a directimpact on the improved quality and international comparability of the financial accounts;

• the collection and compilation of the new international banking statistics on a consolidated basis,in response to a data requirement from the Bank for International Settlements (BIS);

CENTRAL CREDIT REGISTER - Written and personal information| Head-office, Oporto Branch and District agencies

In 2005 Banco de Portugal published the 7thissue of the series “Cadernos do Banco dePortugal” (Banco de Portugal Booklets). Thisissue is dedicated to the operation of the centralbalance sheet database and provides the publicwith information on its objectives, way offunctioning, contents, and how to access it.

As to the dissemination of information to theusers of the central credit register database,in 2005 (i) a total of 3.4 million consultationswere made by participating entities and (ii)approximately 136 thousand requests weresubmitted, either personally or in writing (seechart).



• the supply to BACH – Bank for the Accounts of Companies Harmonised Database, managed bythe European Commission, of data for the 1991-2003 period regarding the information reportedby non-financial corporations to the central balance sheet database. In addition, methodologicaldata were also reported, which will be integrated in the metadata to be disseminated in 2006, withinthe scope of that database new model.

Participation in projects at the European level

Banco de Portugal participated in some statistical projects at the level of the European bodies,namely:

• the work developed in the context of the “centralised securities database”, intended to implementthe security-by-security system in the ECB, with the participation of NCBs. Within this project a newphase was initiated, aimed at establishing the online access of NCBs to the above-mentioneddatabase;

• start of the regular data interchange between the central credit register and several similar CreditRegisters managed by other NCBs of the euro area. On a first stage, this data interchange focusesonly on credit liabilities of legal persons above €25,000 and involves the participation of the NCBsof Germany, Austria, Belgium, Spain, France, Italy and Portugal. This process allowed the centralcredit register database to be expanded, by incorporating liabilities resulting from credit grantedto national legal persons by the financial systems of the other 6 countries participating in thissystem;

• work associated with the definition of the joint dissemination of euro area statistics. The new jointdissemination model for Eurosystem statistics started on 6 December 2005 and it was madeavailable on the Internet, both on the ECB’s and on the NCBs’ websites.

Quality

Concerning the activities carried out to improve the quality of statistics, it is worth mentioning a numberof meetings with reporting agents in the different statistical domains and the implementation andfacilitation of working groups involving not only the reporting agents, but also the users of statistics.

With the purpose of obtaining more details on reported data, Instruction no. 31/2005 on “securitiesstatistics: transactions and positions” was published in November and entered into force on1 January 2006, replacing Instruction no. 15/99.

Reporting institutions were given: (i) the “Guidelines for the report of securities statistics”, whichdescribes the specifications to be used when reporting data on securities statistics to Banco dePortugal; and (ii) the 2nd edition of the “Guidelines for reporting balance sheet and interest ratestatistics of monetary financial institutions”. This guideline includes a correspondence table betweenmonetary financial statistics and adjusted accounting standards (AAS), which was widely requestedby monetary financial institutions, and constitutes a key element of support for these institutions,decisively contributing to the good quality of the data reported in this field.

Furthermore, the Statistics Department of Banco de Portugal has taken several internal initiativesintended to audit the quality of the information produced, inter alia, the confrontation between thedifferent internal information systems.



8.7. International relations

Banco de Portugal’s activities are increasingly developing in an international context. First, this reflectsfundamental economic reasons. These are associated with the overall logic of the current economic andfinancial system, with growing direct and indirect impact on the Portuguese economy and on its partnersand counterparties either in Europe and in the euro area, or within the framework of its privileged relationswith Portuguese-speaking countries. However, it also reflects institutional reasons: Portugal is a MemberState of the European Union and participates in the euro area, it is a member of the International MonetaryFund (IMF) and of the Organisation for Economic Co-operation and Development (OECD) and, therefore,it intervenes in the relevant institutions and bodies; Banco de Portugal is a member of the Bank forInternational Settlements (BIS).

The Bank acts in several international fora, participating and intervening at various levels and stages ofinternational discussions and decisions, with a direct or indirect relevance to the Portuguese economy orthe monetary area to which Portugal belongs. This participation is diversified in terms of time and means,and includes monitoring important issues and debates of the world economy, policy analysis, discussionand decision, the design and definition of strategies and the architecture of the international financialsystem, as well as the preparation, contribution and technical adaptation with a view to an efficientparticipation, in accordance with subscribed international standards and codes. Therefore, the Governorand the Bank’s members and representatives intervene in several international institutions, bodies andworking groups. Internally, the Bank is organised and operates in line with the international framework.

The international activity of Banco de Portugal focused on the work developed at the European Systemof Central Banks (ESCB), which is composed of the European Central Bank (ECB) and the nationalcentral banks (NCBs) of European Union Member States and, in particular, of the Eurosystem, i.e. thesystem of euro area central banks, comprising the ECB and the NCBs of the countries participating in theeuro area.

The Governing Council of the ECB is the supreme decision-making body of the ESCB/ECB. Governors,including the Governor of Banco de Portugal, are ad persona members of this Council. Pursuant to theTreaty establishing the European Community and the Statute of the ESCB/EBC, the Governing Councilis responsible for adopting guidelines and taking decisions to ensure the performance of the tasksentrusted to the ESCB. Such tasks include the definition and implementation of the euro area monetarypolicy, in accordance with the primary objective of maintaining price stability, the conduct of foreignexchange operations, the holding and management of the official foreign reserves of the Member Statesand the promotion of the smooth operation of payment systems.

The ESCB shall also contribute to the smooth conduct of general economic policies in the European Union,in addition to responsibilities in the fields of supervision, international representation and statistics, as wellas comprehensive advisory functions related to its tasks.

In 2005 the Governor participated in twenty-three meetings of the Governing Council, two of which viateleconference. As a rule, monetary policy decisions are taken and the interest rates for the euro areaare announced in the first of two monthly meetings. Such decisions reflect the detailed analysis anddiscussion of the economic, financial and monetary situation of the euro area. Also in 2005, theoperational framework of monetary policy was revised, and subsequently included in a new version ofthe General Documentation.

Other decisions taken at the meetings of the Governing Council in 2005 included, in particular, decisionsrelated to the payment system, namely those leading to the formalisation of the ECB’s participation inTARGET2 (Trans-European Automated Real-time Gross settlement Express Transfer system). Mentionshould also be made to the analysis of the financial system stability, summarised and published in the“Financial Stability Review”, a bi-annual report published since 2004, and to the monitoring of topics



regarding integration, supervision and regulations. Regarding statistics, the improvement in the accessibilityto euro area statistics and their breakdown by Member State are worth mentioning. This information is nowdisclosed to the public in the corresponding websites, in a combined, consistent and simultaneousmanner.

In 2005 Governing Council members also addressed a number of important topics of the European andinternational agenda. More specifically, they made public contributions to major European issues, such asthe reform of the Stability and Growth Pact, the revision of the Lisbon Strategy and the Constitutional Treaty.In all cases, the supported approach aimed at ensuring an understanding regarding the primary objectiveand the consistency with its tasks, preserving the anchors and the climate of confidence achieved, namelywith respect to price stability. At the same time, it aimed at ensuring openness to reach and reinforceEuropean institutions and policies, improving and adjusting its operation within a more complex,competitive and demanding external and internal environment.

In April 2005 Bulgaria and Romania signed the Accession Treaty which, after being ratified, will enter intoforce on 1 January 2007, bringing the number of European Union Member States to twenty-seven.Meanwhile, as in previous similar cases, the Governors of the NCBs of these two countries wereinvited to participate as observers in the General Council of the ECB. The responsibilities of this body,which comprises the President and Vice-President of the ECB and the governors of the NCBs of theESCB and, therefore, the Governor of Banco de Portugal, stem from the fact that some Member Statesdo not participate in the euro area. It carries out the tasks taken over from the European MonetaryInstitute. The agenda of its four meetings held in 2005 included, namely, the monitoring of economicand monetary developments of the European Union and the operation of the Exchange RateMechanism, ERM II.

In addition to monitoring global economic and financial developments, the euro area aimed to activelyintervene in the design of solutions related to the architecture of the global financial system, assumingits responsibilities in solving major imbalances and assuring the preservation and disclosure ofdemanding surveillance standards.

Governing Council decisions taken during meetings or by written procedure often depend on thetechnical contribution and preparation of ESCB/Eurosystem committees and other bodies. Thecommittees, which as a rule are broken down into substructures, generally count on the participationof experts of NCBs belonging to the Eurosystem and, whenever dealing with matters which fall withinthe field of competence of the General Council of the ECB, also experts of NCBs of non-euro areaMember States. The whole activity of the ESCB is thus monitored with virtually no exception, includingthe ex post implementation and follow-up of decisions. Participation in these committees andcorresponding substructures was ensured by members and experts from most Departments ofBanco de Portugal, according to their specific competences, covering the monetary policy, marketoperations, payment systems, banking supervision, statistics, banknotes, accounting, auditing,information technologies, communication, legal issues and international relations. Through theBudget Committee, Banco de Portugal also monitored fiscal issues of the ECB and participated inthe recently created Human Resources Conference.

In January 2005 Governing Council members signed the Eurosystem’s Mission Statement, reinforcingteam work and a common goal for NCBs and the ECB in the Eurosystem framework.

Through the Eurosystem, participation in major international and European debates is widened.This reinforces the direct intervention of the Governor in other bodies or contexts, such as the IMF,BIS or the Informal Ecofin. It also reinforces Bank members’ action in groups and structures andin co-operation activities with other Portuguese authorities, particularly in EU bodies, such as theEconomic and Financial Committee (EFC), the Economic Policy Committee and the Eurostat, as wellas in the OECD.



The regular participation of Banco de Portugal in the activities of the Economic and Financial Committee(EFC) continued to be worthy of note, given the important role played by this committee in the monitoringof the economic and financial situation of Member States and the Community and in the preparation – inthe areas envisaged in the Treaty – of the work and decisions of the ECOFIN Council, including the informalmeetings, open to Central Bank Governors. In this context, the Governor participated in the informalECOFIN meetings held in Luxembourg and in Manchester (in May and September 2005 respectively).

As in previous years, a substantial share of EFC’s activities fell within the framework of the Stability andGrowth Pact (SGP), including regular multilateral surveillance, the examination of the updated Stability/Convergence Programmes and the preparation and monitoring of decisions related to the implementationof the Excessive Deficit Procedure, as well as the implementation of the reform of the SGP itself, whichwas initiated in 2004. Although these issues were addressed mainly in restricted composition – withoutthe presence of NCBs, in the wake of the reorganisation of the Committee in 2003 – they were also brieflydiscussed in full composition. Furthermore, NCB representatives participated in every discussioninvolving the respective countries. Consequently, BP participated in the examination of the updatedPortuguese Stability Programme (in June) and in the various steps of the Excessive Deficit Procedureconcerning Portugal (under Articles 104(3) to 104(7) of the Treaty). The EFC also continued to contributeto the update of the Broad Economic Policy Guidelines of the Member States and the Community and tomonitor the respective implementation, in the light of the Lisbon Strategy. Statistical issues (e.g. priorities,governance, quality and reliability of fiscal data) and, mainly, topics related to financial markets andservices were also given particular attention. In this context, in addition to the systematic monitoring – infull composition – of the work undertaken by the Financial Services Committee (established in February2003 by ECOFIN and regularly reporting to the EFC), two Financial Stability Tables were organised. Otherimportant topics of the agenda were related to the euro (e.g. preparation for the introduction of the euro incurrently non-participating countries; design of euro coins). In order to strengthen the co-ordination ofpositions at the international level and within the scope of the Community’s external representation, focuscontinued to be placed on the preparation of the EU Presidency’s participation in several fora (in particularthe IMF/World Bank meetings) and on the preparation of European “common understandings”/”terms ofreference” on relevant issues of the international financial agenda. The importance of these subjects wasreflected in the agenda of the EFC sub-committee on IMF and Related Issues (in which Portugal has beenrepresented by the Bank), particularly regarding issues related to the IMF strategic review, quotas andvoice. Also worthy of mention within the scope of the EFC were two meetings of the Sub-Committee onEU Government Bonds and Bills Markets (in which BP is also represented).

Bank’s activities related to the IMF are also relevant.

In 2005 Banco de Portugal delegations participated in the Spring Meetings of the InternationalMonetary and Financial Committee, held in Washington in April, and in the Annual Meetings of theIMF/World Bank in September.

The focus of these meetings was on world economy and financial market developments, asaddressed in the “World Economic Outlook ”and the “Global Financial Stability Report”, on thedefinition of a medium-term strategy for the IMF and on its role in supporting low-income countriesefforts to reduce poverty and create conditions for sustainable growth. Progress reports were alsopresented on surveillance, prevention and resolution of crisis, the programme to combat moneylaundering and terrorist financing and activities of the Independent Evaluation Office. Other topicsincluded quotas and IMF representation.



The annual meetings took place in the context of strong but unequal growth of the world economy, risingoil prices and favourable developments in financial markets. They focused on major global imbalances andon the role of advanced economies and the new emerging economies, in particular China, in the resolutionof such imbalances. The “World Economic Outlook” highlighted the importance of the quality of institutionsfor creating favourable conditions for sustainable growth, and stressed the fragility of progress concerningthe Millennium Development Goals.

These topics were also addressed at the 15th Lisbon Meeting with the delegations of Portuguese-speakingAfrican Countries (PALOPs) and East Timor. As in previous years, this Meeting helped to jointly preparethese delegations for the IMF/WB Annual Meeting.

The main conclusions with regard to the medium-term strategic stance of the IMF point to the strengtheningof surveillance. Surveillance should be more focused, selective and adjusted to the specific context of itsbilateral implementation and should aim to identify vulnerabilities and risks, particularly with systemicpotential. In multilateral terms, the greater importance of structural and long-term issues, includinginstitutional aspects, should be the object of a regular and systematic specific analysis, possibly leadingto a new Report.

At the internal level, Banco de Portugal followed and analysed in some detail the IMF agenda. In 2005 theBank also continued the technical monitoring of IMF-related topics, which were discussed namely in theESCB’s International Relations Committee (IRC) and in the Economic and Financial Committee, with theparticipation of Banco de Portugal members.

In terms of bilateral surveillance, two important IMF missions visited Portugal in 2005: in July, under ArticleIV of the agreement with the IMF; in December, in the framework of the Financial Sector AssessmentProgram (FSAP). This involved preparation, organisation and monitoring by the Bank, in its capacity asfiscal agent of the Portuguese State.

As usual, the visit under Article IV included, in addition to the work undertaken at Banco de Portugal,extensive contacts with other national authorities and general government and private sector entities,namely of the financial sector, major companies and social partners. Conclusions and reports,focusing on developments of and prospects for the Portuguese economy, public finances andconditions for competitiveness and growth, were publicly disclosed, in accordance with the transparencypractices subscribed by Banco de Portugal.

In 2004 Portugal requested participation in a Financial Sector Assessment Programme (FSAP). FSAPis a voluntary programme started in 1999 as a joint initiative of the IFM/WB. It was created as part ofthe bilateral surveillance aimed at contributing to strengthen the financial systems of member states.It consists in an overall assessment of the financial sector, including banks, insurance and real estatemarkets, focusing in particular on its characterisation, the identification of vulnerabilities and risksand the supervisory and regulatory framework.

This is a highly complex work, involving the implementation of a strict and systematic framework,supported by extensive statistical data, and the survey and assessment of the observance ofstandards and codes of good practices for the banking, insurance and real-estate markets, i.e. theBasel Core Principles for Effective Banking Supervision (BCP), the International Association ofInsurance Supervisors’ Insurance Core Principles (IAIS) and the International Organization ofSecurities Commission’s Objectives and Principles of Securities Regulations (IOSCO) respectively.

The first visit focused on the banking and securities sectors, while the insurance sector will likely beanalysed during the second visit of this mission, in 2006. Banco de Portugal was very much involvedin this work, both on a macroprudential basis and in its capacity as a supervisory and regulatory entityof the banking system, within the scope of the Conselho Nacional de Supervisores Financeiros(National Council of Financial Supervisors). Reports produced as a result of this programme shallbe publicly disclosed.



Within the scope of relations with the IMF, Portugal subscribes to the Special Data Dissemination Standard(SDDS), and it is incumbent on Banco de Portugal to ensure that relevant commitments are met and tomonitor reviews of any related initiatives, as was the case in 2005.

Banco de Portugal is a shareholder of the Bank for International Settlements. In 2005 a delegationchaired by the Governor participated in the 75th Annual General Meeting, as well as in the ExtraordinaryGeneral Meeting, with a view to amending the Statutes of the BIS in the field of governance.

In addition to this participation, the Bank monitored the activities carried on by this body and itsstructures, particularly in its capacity as a discussion and decision forum on issues related to thestability of the financial system. The Bank took part in statistical initiatives and in the exchange ofinformation associated with various thematic surveys. In particular, the Bank took part in activitiesrelated to the Basil Committee on Banking Supervision and in the work leading to the new Basel IIFramework and to the revision of the Capital Accord.

Banco de Portugal is represented in several OECD committees and working groups. It is part of thenational delegations of a number of committees, namely on economic policy, reviews and financialmarkets, also intervening in working groups and expert groups, particularly in the field of financialstatistics and statistics on international trade of services and debt management. During 2005, theBank ensured participation in works and meetings of these committees and groups, and, in particular,contributed to the OECD’s report on Portugal. It took part in discussions, at the national level, on thedefinition of the medium-term strategic stance of this organisation, stressing the importanceassociated with the international environment, work quality and structural analysis. Given itsresponsibilities with the preparation, review and disclosure of monetary, financial and balance ofpayments statistics, the Bank continued its activity in several committees and working groups of theEurostat.

Banco de Portugal also ensured the representation in the Committee of European BankingSupervisors, as well as commitments in the field of combating money laundering.

In view of the importance given to the domestic and international disclosure of information, Banco dePortugal translated and published the Portuguese versions of several reports and documents ofinternational bodies – namely those produced by the ECB – and prepared English versions of varieddocumentation and legislation, in particular as a contribution to the FSAP programme. The mainpublications of Banco de Portugal – the “2004 Annual Report”, the first issue of the “Financial StabilityReport”, the “Economic Bulletin” and the “Statistical Bulletin” – were translated into English anddisclosed on the Bank’s website, in addition to being distributed in printed version.

At a bilateral level, the main counterparts of the international relations of the Bank in 2005 were othercentral banks, namely the Portuguese-Speaking African Countries (PALOPs) and East Timor.

Co-operation initiatives developed throughout 2005 consisted mainly in the implementation and consolidationof important reforms in the central banks of the above countries, namely reflecting developments in theirfinancial systems and monetary and exchange markets as well as the higher requirements regarding thesupervision of the banking system. Co-operation during the current year covered nearly all main activityareas of a central bank, involving all Departments of the Bank, and was chiefly characterised by thecontinuity of the projects started in previous years.

Therefore, the technical assistance provided by the Bank focused on monetary policy, accounting andbudgetary control, human resources management, legal advice, document management, organisationand information and internal auditing. Upon request of the IMF, the Bank assessed therecommendations submitted in the two technical assistance missions to the Central Bank of S. Toméand Príncipe carried out in the previous year, where monetary policy and liquidity managementinstruments were analysed. The Bank continued to participate in the Exchange Rate Co-operationAgreement Commission (COMACC) with Cape Verde and in the corresponding Macroeconomic



Monitoring Unit of this Agreement, which was signed between the Portuguese and Cape VerdeanGovernments in 1998. It continued to manage the Cape Verde Stabilisation Trust Fund, established as aback-up to the conversion of the domestic debt of the Cape Verdean State, in its capacity as externalmanager mandated by the Cape Verdean authorities.

Also in 2005, the Bank, in co-operation with the IMF, organised a seminar on “Monetary and FinancialStatistics: Compilation and Report”, within the scope of the GDDS (General Data DisseminationStatistics) and a course on “Financial Programmes and Policies”, both aimed at experts of centralbanks of the PALOPs and East Timor, held in Lisbon. Three other courses were organised: one on“Banknotes Security Features”, in Praia, and two in Maputo, on the “Central Bank System of Accounts” andon “Fiscal Management”.

In 2005 there was some increase in activities involving simultaneously most Portuguese-speakingCountries, such as round tables/meetings. In this field, the main event was the 15th Lisbon Meetingwith the Delegations of the PALOPs and East Timor to the IMF/WB Annual Meeting, which took placeon 19 and 20 September, on the topic “The Banking System and Economic Development”. The 2nd

Governor Meeting was organised in Maputo, this year as part of the celebrations of the 30th Anniversaryof Banco de Moçambique, addressing, as main topics, “The Implementation of IAS in the CentralBanks of the Portuguese-Speaking Community” and “The Pillars of Good Governance in CentralBanks”. In the context of the abovementioned celebrations, a symposium was held on the “Challengesof Regional Integration”. Special mention should also be made to the organisation, in Maputo, of theround table on payment systems, for the discussion of “The role of the payment system in the controlof systemic risk”, “Oversight of the payment system” and “Assessment and management of paymentrisks”. Also in 2005 the 3rd Statistics Meeting was held in Luanda and the “VII Forum of Informationand Communication Technologies and Systems” of the Portuguese-Speaking Community tookplace in Brasília. Banco de Portugal participated in the organisation of a seminar on the “Disclosureand Implementation of International Standards Regarding the Prevention of Money Laundering andTerrorist Financing”, promoted by the Portuguese Ministry of Justice and funded by the World Bankand the IMF. This seminar was held in Lisbon, from 2 to 6 May, with the participation of the central banksand other official institutions of the PALOPs and East Timor.

Still within the framework of the relationship with the PALOPs, Banco de Portugal was appointedmember of the Comissão Paritária (a Joint-Collective Agreement Committee) established accordingto the provisions of the Additional Note to “Debt Payment, Lodgement and Reconciliation Proceduresbetween the Republic of Angola and the Portuguese Republic, publicly owned institutions, thePortuguese Credit Insurance Agency, banks and companies, of 5 May 2004”. In 2005 the abovementionedJoint-Collective Agreement Committee considered and decided on the existence of credits regardingseven processes that had not been confirmed by Angolan authorities. On the other hand, also in the wakeof the Debt restructuring agreement between Angola and Portugal, the Fundo de Cooperação deInvestimento Português em Angola (Portuguese Co-operation Investment Fund in Angola) was terminatedwith the publication of Decree-Law no. 116/2005 of 18 July. The relevant activity reports and accounts wereprepared on the date of extinction (30 June 2004) and, after being approved by the Board of Directors, weresent to the State and Finance Minister and to the Court of Auditors.

The Bank has also carried on co-operation activities with central banks of emerging economies andother low-income countries.

Most activities carried on in 2005 with this group of countries were part of the international agendaof the European Central Bank, in particular of the IRC, which defines a regular work program in termsof the main world regions/economies.



Therefore, in parallel with a limited series of bilateral initiatives or activities funded by the Communitybudget, which are almost exclusively intended for EU candidate countries, in 2005 the Bank participatedin several workshops/seminars with Mediterranean countries and with Russia, within the scope of theactivities of the above ECB Committee.

In the first case, the ECB, in co-operation with Banque de France, organised the Second Seminar withthe Central Banks of Mediterranean Countries (Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta,Morocco, Palestinian Monetary Authority, Syria, Tunisia and Turkey), held in Cannes in February, inwhich Banco de Portugal participated. Its main topics were “Recent economic and financialdevelopments in the Mediterranean countries”, “Workers’ remittances and their effect on convergencebetween the euro area and the Mediterranean countries and Central Bank independence”. InSeptember, the Bank participated in the preparatory workshop for the Third Seminar of the Eurosystemwith Mediterranean Countries where the following topics were addressed: analysis of recenteconomic and financial developments in Mediterranean countries, capital account liberalisation andreform of the monetary policy instruments in Mediterranean countries.

Within the regular dialogue between the Eurosystem and the Central Bank of Russia, the Bank alsoparticipated in the seminar that took place in October, in St. Petersburg, and whose main topics were“Monetary policy in Russia”, “Challenges for banking sector stability” and “Deposit insurance andbanking sector development”.

Still in the context of the international agenda of the ECB, Banco de Portugal continued to participatein the Task Force on Central Bank Co-operation – an IRC substructure whose mission is to co--ordinate the co-operation activities of the Eurosystem. In 2005, also within the scope of the IRC, anew group was established – the Task Force on Enlargement – with the main objective of assessingthe macroeconomic and financial stability of EU candidate countries and preparing a report, whichafter discussion at the IRC, will be the basis for the High Level Economic Dialogue Between EU andCandidate Countries, promoted by the Economic and Financial Committee (EU) to be held in the firsthalf of 2006. Banco de Portugal also participates in this task force.

The Bank also participated in two projects funded by the EU: the first one was the TACIS project(Technical Assistance to the Community of Independent States), with the Central Bank of Russiamainly in the field of banking supervision and co-ordinated by structures within the scope of IRC, thatincluded the organisation of two courses, in Moscow, on “Credit risk/credit portfolio inspection”; thesecond project was the twinning project with the National Bank of Romania: “Strengthening bankingsupervision and further institutional developments”, in which the Bank co-operated in legal andregulatory areas. In the latter case, the Bank organised a course, in Bucharest, on cross-border credittransfers (Directive 97/5/EC) and participated in a workshop related to the same Directive, held inRome, aimed at facilitating the exchange of experiences between legal experts of the Romaniancentral bank, Banca d’Italia and Banco de Portugal.

Also funded by the Community, and under the TAIEX (Technical Assistance Information ExchangeOffice), a delegation of the Central Bank of Bulgaria visited the Bank, to discuss the harmonisationof interest rate statistics.

Finally, and strictly at a bilateral level, two delegations were received: one in June, of the Central Bankof Malaysia by the Statistics Department, and another in July, of the Financial Supervisory Commissionof the Republic of Korea by the Banking Supervision Department. Special mention should also bemade to the resumption of the project, started in 2003, to provide support to the Instituto Brasileirode Geografia e Estatística (Brazilian Institute of Geography and Statistics), in the field of financialaccounts.



8.8. Financial activities

8.8.1. Management of the Banco de Portugal’s own investment assets

At the end of 2005, total assets were valued at €20,377 billion, which corresponds to an increase of around10%, compared with €18,504 billion at the end of 2004.

The value of the euro and foreign currency portfolio, valued on a marked-to-market basis was €14,207billion (compared with €13,725 billion at the end of the previous year).

At the end of 2005 the value of the gold portfolio was €5,836 billion (compared with €4,779 billion in 2004),which corresponds to around 417.5 tons, i.e. 45 less than at the end of 2004, due to sales made under the“Central Bank Gold Agreement”, with the purpose of diversifying the composition of Banco de Portugal ownassets.

In the course of the year, a medium-term investment portfolio was created, managed and valued on a “heldto maturity” basis, standing at the end of the year at €334 million.

In the period under review, the strategic benchmark was revised twice, always with the aim ofmaximising profitability, while complying with the risk and liquidity rules.

8.8.2. Financial relations with the State

The settlement account of the Directorate-General of the Treasury, which centralises all financialmovements between the Bank and the Treasury, posted a credit balance of €5.90 on 30 December2005.

In addition to the above-mentioned account, the central government holds a special account withBanco de Portugal, the so-called “Public Treasury – investment account – available resources”, whichis remunerated according to specific rules. At the end of 2005 this account posted a nil credit balance.

8.9. Exchange authority

According to the provisions of Decree-Law no. 295/2003 of 21 November, namely Article 12, creditinstitutions or financial corporations authorised to trade in foreign currency may sign contracts withnon-financial corporations operating in the tourism and travel sectors to carry out manual foreignexchange operations, which are subject to a special registration with Banco de Portugal. Under thatsystem, in 2005 the Bank registered 17 manual foreign exchange contracts.

In terms of proceedings relating to breaches of foreign exchange regulations and in the use of thepowers entrusted to it by Articles 37 and 42 of the above-mentioned Decree-Law, the Bank starteda new one and inspected an entity indicted for the unlawful practice of foreign exchange activities; asa result of another proceeding, the Bank decided to apply a fine to the entity in question.

With regard to proceedings relating to breaches of foreign exchange regulations compiled underthe terms of Decree-Law no. 13/90 of 8 January, revoked by the above-mentioned Decree-Lawno. 295/2003, one proceeding was taken to trial, where prescription was decided on grounds thatthe proceeding had reached the time limit.



8.10. Internal organisation and management

8.10.1. Human resources

The Human Resources Management and Development Department was engaged in severalactivities and initiatives in 2005, among which the following should be mentioned:

• Structural reorganisation of the Economic Research Department (DEE), the Market and ReserveManagement Department (DMR) and the Control and Accounting Department (DCC).

• Development of recruitment and selection processes both internal and external, promoting theincrease in the qualification levels, as well as the enhancement of the staff’s potentialities,whenever deemed adequate; pursuance of a policy of co-operation with the academic milieu, bymeans of remunerated traineeships for recent graduates.

• Pursuance of measures for the simplification and fine-tuning of the Bank’s compensation scheme,as well as of the main staff rules governing the management of assessment tools and therewarding of professional merit, ensuring the conciliation of the respective work cycles, thuspromoting a higher integration and consistency for its management.

• Analysis and proposal for the revision of the Bank’s Career Model, with a view to obtaining higherconsistency and integration and to improving the management and development of the Bank’sstaff.

• Development of a set of institutional training programmes, encompassing the development oftechnical, specialised and behavioural competences, aiming at improving the level of knowledgeand performance of human resources.

• Participation of top and middle managers as well as of other senior officials in joint training actionsfor the national central banks of the EU (in the field of management, leadership and integration inthe ESCB). In this context, BP organised the course “Heading for Leadership”.

• Furtherance of negotiations aimed at the signing of the so-called Acordo de Empresa (WorksCouncil Agreement), with the banking sector trade unions of the north, centre, south and the islands.

• Pursuance of bilateral co-operation actions with the central banks of Portuguese-speaking AfricanCountries (PALOP) and other Portuguese-speaking countries regarding the training of specialiststaff, internships in Banco de Portugal, as well as expert advisory actions in Human ResourcesManagement to staff members of the central bank of Mozambique.



Staffing

In 2005 the number of staff of Banco de Portugalfell from 1,736 to 1,702, accounting for a 2 per centdecrease.

In 2005 the Bank recruited 21 staff. There were46 retirements (7 disability retirements, 13 normalage retirements, 2 negotiated early retirementsand 24 regularly agreed retirements). There were6 terminations of labour contracts, 1 dismissaland 2 deceases.

The Bank’s total workforce comprised 951 malestaff and 751 female staff. 1,461 worked at thehead office, 130 at the Oporto branch and 111 atthe regional delegations and agencies.

The first table shows the development pattern ofthe Bank’s staff over the past five years.

Among the 1,702 employees, there were 44Heads and Deputy Heads of Department, 63managerial staff, 673 professional staff, 92specialist staff and 532 administrative staff. Theremaining 298 were managers and support staffbelonging to Groups II, III and IV.

Group I, comprising 1,404 employees, repre-sented 82.5 per cent of total staff, followed byGroup III with 191 employees, representing 11.2per cent of total staff. Over the past five years, thedevelopment pattern of Contractual Groups wasas shown in the third table.

Age groups

The breakdown by age groups shows that thegroup with the highest number of staff was the46/55 age group (819), followed by the 36/45age group (312).

There were 254 employees aged below 36,corresponding to 14.9 per cent of total staff. 78employees were over 61, corresponding to 4.6per cent.

On 31 December 2005, the average age groupwas 45.9 for women, 47.9 for men and 47 fortotal staff, reflecting a slight increase from theprevious year (46.6 years).

AGE GROUP DEVELOPMENT PATTERN

Age group 2001 2002 2003 2004 2005

19/25 41 29 23 24 32

26/30 120 122 111 103 91

31/35 122 132 138 140 131

36/45 666 600 521 408 312

46/55 625 644 701 766 819

56/60 185 222 239 234 239

61/65 55 45 53 60 77

> 65 - - - 1 1

Total 1,814 1,794 1,786 1,736 1,702

Staff 2001 2002 2003 2004 2005

G. I 1,486 1,475 1,470 1,426 1,404

G. II 66 65 63 62 57

G. III 207 202 201 197 191

G. IV 55 52 52 51 50

Total 1,814 1,794 1,786 1,736 1,702

CONTRACTUAL GROUPS

Staff 2001 2002 2003 2004 2005

Male 1,062 1,034 1,021 980 951

Female 752 760 765 756 751

Total 1,814 1,794 1,786 1,736 1,702

STAFF DEVELOPMENT PATTERN

Categories G. I G. II G. III G. IV

Heads and DeputyHeads of Department 44

Managerial staff 63 9 19 6

Professional staff 673

Specialist staff 92

Administrative staff 532

Support staff – 48 172 44

Total 1 404 57 191 50

PROFESSIONAL CATEGORIES



Seniority

With regard to seniority, and as shown in thefollowing table, the largest group of staff (548)has served the Bank for 21/25 years, followed bythe group who has served the Bank for more than25 years, with 501 employees.

There were 442 employees who have served theBank for up to 15 years, accounting for 26 per centof total staff, against 1,260 employees (74 per cent)who have served the Bank for more than 15 years.

The average seniority in the Bank was 20.5 years,i.e. remaining unchanged from the previous year.

Level of education

Taking into consideration the specific functions ofthe central bank and the number of its professionalstaff (674), it can be concluded that, on average,the level of education of the Bank’s staff was high.

The 737 employees with a university degree (354women and 383 men) corresponded to 43.3 percent of total staff.

Retirees and pensioners

In 2005 there were 1,745 staff in retirement (16 morethan in the previous year), and for the first time thenumber of retirees exceeded the number of activestaff (1,702), corresponding to more than 2.5 per cent.

The number of pensioners decreased from 480(in 2004) to 478 (in 2005), accounting for 28.1 percent of the Bank’s active staff.

Professional training

During the year under review, 1,148 employeestook part in internal and external (in Portugal andabroad) training activities, totalling 2,278participations, 1,816 of which were internal and462 external. Of these 281 were in the country and181 abroad.

There were 487 training actions, correspondingto 34,640.5 hours (13,492 hours less than in theprevious year), of which 24,628.5 hours at internallevel and 10,012 hours at external level.

The average number of training hours peremployee decreased from 27.7 hours in 2004 to20.4 hours in 2005. Over the same period, takinginto account the 1,702 staff, the rate of participationstood at 67.5 per cent (compared with 72.7 percent in 2004).

SENIORITY DEVELOPMENT PATTERN

Seniority 2001 2002 2003 2004 2005

Up to2 years 73 83 71 63 55

3 to 5 108 60 68 73 80

6 to 10 158 171 168 174 169

11 to 15 151 150 136 136 138

16 to 20 585 564 411 291 211

21 to 25 277 303 435 526 548

> 25 462 463 497 473 501

Total 1,814 1,794 1,786 1,736 1,702

2001 2002 2003 2004 2005

PhD 16 20 20 21 21

Master's degree 60 67 73 75 77

Graduation 631 637 647 637 639

Bachelor's degree 38 35 33 32 30

Upper secondaryeducation 511 491 478 447 431

Lower secondaryeducation 239 234 231 225 214

Elementary school 317 308 303 298 289

No grade 2 2 1 1 1

Total 1,814 1,794 1,786 1,736 1,702

LEVEL OF EDUCATION

RETIREES AND PENSIONERS DEVELOPMENTPATTERN

2001 2002 2003 2004 2005

Retirees 1,683 1,689 1,688 1,729 1,745

Pensioners 473 491 476 480 478

PROFESSIONAL TRANING DEVELOPMENTPATTERN

Training 2001 2002 2003 2004 2005

Participants 1,322 1,192 1,092 1,262 1,148

Hours 36,307 29,505.5 36,102.5 48,132.5 34,640.5



Pension Fund value 898,722 940,602 1,012,217 1,181,527 16.7%

Past service liabilities 930,787 969,954 1,040,909 1,207,430 16.0%

Beneficiaries (retired staff/pensioners) 490,462 497,055 548,951 684,972 24.8%

Participants (employees) 440,325 472,899 491,958 522,458 6.2%

Funding level 96.6% 97.0% 97.2% 97.9%

FINANCIAL STANDING OF THE PENSION FUND AS AT THE END OF THE YEAR

2002 2003 2004 2005

EUR thousands

Change2004-2005

8.10.2. Pension Fund

The Pension Fund of Banco de Portugal, set up in 1988, is composed of autonomous assets,exclusively earmarked for the fulfilment of Banco de Portugal’s commitment to pay retirement,disability and survivors pensions, as well as post-retirement contributions to the health system.

It is a closed pension fund, providing defined benefit plans that integrate the first pillar of socialprotection.

Sociedade Gestora do Fundo de Pensões do Banco de Portugal, S.A. (Banco de Portugal’s PensionFund Management Company) is responsible for managing the Pension Fund and for performing allthe actuarial valuations required to compute the liabilities related to the benefit plans and othercharges financed by the Fund. Banco de Portugal holds 97.7 per cent of the capital of this company,whose staff is composed of Banco de Portugal’s employees covered by a secondment arrangement.

In accordance with the provisions laid down in Notice of Banco de Portugal no. 4/2005 of 28 February,the actuarial methods as well as the main calculation assumptions are detailed in the note onretirement and survivors pensions, in the Financial Statements section of this Annual Report.

Market rates are used to discount the future cash flows related to the Pension Fund’s liabilities. Thismethodology rests on the assumption that the actual value of liabilities must represent, at eachmoment, the capital that should be invested to meet all future payments. The adoption of this principledirects the investment policy towards assets that largely reflect the liabilities’ time structure.

The high maturity of the population covered by the Pension Fund of Banco de Portugal, in which thenumber of beneficiaries (retired employees and pensioners) is higher than the number of activeparticipants (with a ratio of the latter to the former of 0.77 at the end of 2005) and the resulting highweight that pensions already being paid represent in total liabilities (52.6 per cent) strongly constrainthe asset management of the Fund.

The financial management policy is aimed at maximising the profitability of the Fund’s assets vis-à-visliabilities, while sticking to a conservative approach, regarding the control of the exposure of the Fund’sassets to market and counterparty risks, as well as the maintenance of an adequate degree of liquidityin order to meet all the scheduled pension payments.

On 31 December 2005 the assets of the Pension Fund of Banco de Portugal amounted to€1,181.5 million, up by €169.3 million from a year earlier. Total past service liabilities amounted to€1,207.4 million, €685.0 million of which relate to retirees/pensioners and €522.4 million correspondto past service liabilities of active employees. In 2005, total past service liabilities increased by€166.5 million.



This substantial increase in the Fund’s liabilitiesresults from the revision of their valuationmethodology, in the context of the adoption of thenew international accounting standards (IAS).Worthy of note are the change in the mortalitytable to the TV 88/90, applicable to both men andwomen, the adjustment made to the normalretirement age assumption, and the changesintroduced in the assumptions for the wage andpension growth rates (with the adoption of thebreak-even inflation rate derived from euro areainflation-linked government bonds).

In order to finance the above-mentioned increasein the Fund’s liabilities, Banco de Portugal made an extraordinary contribution of €94.9 million at theend of 2005. In the course of the year, regular contributions totalled €19.8 million.

On 31 December 2005 the Pension Fund recorded an overall funding level of 97.9 per cent, ensuringa 100 per cent coverage of liabilities with pension payments and a 95 per cent coverage of activemembers’ past service liabilities (above the minimum level established in Notice of Banco dePortugal no. 4/2005 of 28 February).

With respect to the activity of Sociedade Gestora do Fundo de Pensões do Banco de Portugal in 2005,the following are worthy of note:

• the valuation methodology of the Fund’s liabilities was revised, as mentioned above, and theinvestment policy was adjusted accordingly; and

• the object of the Fund’s financing was extended, in order to cover the death grant envisaged in thecollective labour agreement for the banking sector, as well as post-retirement contributions to bemade by the Bank to the health system.

8.10.3. Organisation and information technology

The Bank concluded in April 2005 the implementation of the Business Continuity Plan/DisasterRecovery Plan (PCN/PRCC). After a thorough revision of the original draft in the 1st half of 2003, itsimplementation was developed in four stages, from July 2003 to April 2005. The last two stages wereconcluded in January and April 2005. The Bank has since then made available a totally consolidatedinfrastructure platform with a high degree of operational resilience, even considering purely technicalincidents, given its features of operational parallelism (or quasi-parallelism, in areas where there areno effective solutions available in the market in technical and economic terms). The critical businessfunctions of the Bank covered by the PCN/PRCC are safeguarded against a number of situations ofpossible technical failure, thereby ensuring the continuity of its operation even in such situations.

Also within the scope of the PCN/PRCC implementation programme, two simulation tests were madeat the end of stages III and IV. Subsequently, a new simulation was made in November, integratedin the strategy designed and approved in the meantime for the continued monitoring of the PCN/PRCCof Banco de Portugal.

Naturally, activities will continue to be developed, as deemed necessary to integrate the systems tobe implemented in the future in the PCN/PRCC, as well as to ensure the appropriate adjustment ofthe solutions to be implemented as a result of current and natural initiatives related to technical andorganisational developments.

ASSETS AND LIABILITIES OF THE PENSION FUND



The Contents Management solution selected in 2004 was implemented in BPnet. Simultaneously,the Bank designed, implemented and operated a fully renovated Portal for the front-end access to theservices supported by BPnet. These new solutions were launched in April. After a short period of someinstability, the operation of BPnet resumed the previous characteristics of stability, performance andresilience. At the end of 2005, 38 services were available through BPnet, which had 1,696 differentindividual registered users (for approximately 7,000 users.services) of 165 institutions. There werearound 15,000 monthly logins to the Portal and 70,000 content consultations.

In 2005, the TARGET/SPGT availability was 99.97%. In the course of the year there were only a fewminor incidents and no occurrence of effective discontinuity of the service.

The development and maintenance of IT systems involved 58,364 man hours in 2005, of which 25per cent were dedicated to horizontal projects (i.e. aimed at the whole Bank, as opposed to specificbusiness areas). Of the total effort, approximately 50 per cent envisaged the development of newprojects, 15 per cent the evolution of existing applications, 25 per cent the support, maintenance andadjustment of live applications, 4 per cent merely organisational activities (i.e., not envisaged ininformation system projects – Organisational and functional restructuring processes of some ofthe Bank’s departments, rationalisation of printed forms and administrative equipment, technicalco-ordination of the Internal System for Written Communication) and 6 per cent other activities (SPAI– Information Sharing System, support to the planning process of the Information Systems andTechnologies Committee, specialised training and co-operation with Central Banks of the PALOPs).

Among new IT systems, it is worth mentioning the implementation of the new Statistics DisseminationSystem, which provides particularly significant facilities that permit having access to and working withstatistical series, both uni-dimensional and multidimensional. The system was internally madeavailable at the end of July, covering different statistical areas, and on the Internet in January 2006,with the designation Estatísticas OnLine - BPstat. The system will be widened to cover new areas ofstatistical information in the course of forthcoming months.

Furthermore, an ante-project on the future Information System supporting the operation of the centralcredit register was finalised. The conclusions drawn and the design submitted for the architectureof the future system made it possible to take the appropriate decisions for the launching of thecorresponding development project, which is expected to be sizeable and to have a significant impacton the widening of the facilities made available by Banco de Portugal to financial institutions in thisfield. The development project will start in early 2006.

The Bank has also developed a series of studies intended to allow a weighted decision to be madeon the possibility of adopting an ERP solution for the integrated coverage of areas such as accounting,human resources and supply. In the wake of such initiatives, a tender for the acquisition of theappropriate solution and for the corresponding implementation was prepared, to be launched in thefirst half of 2006.

Finally, in the field of co-operation with the central banks of the Portuguese speaking countries,reference should be made to the participation of the Bank, through DOI, in the “7th Forum forInformation Systems and Technologies”, held in Brasilia in June. The issues discussed were: “ITGovernance”, “System architecture, patterns and development procedures”, “IT infrastructures” and“Tertiarisation of IT services”.



8.10.4. Information and documentation

The Documentation, Printed Publications and Museum Area continued to co-operate with the centralbanks of the Portuguese speaking African countries in the field of archive techniques, library services,documentation and museum. It conducted an advisory mission to Banco de Cabo Verde for thedevelopment of its Documentation Division and welcomed in Lisbon trainees from the central banksof Angola, Cape Verde, Mozambique and S. Tomé and Príncipe.

At the European level, it continued to co-operate actively with the European Association for Financialand Banking History, by integrating the Scientific Commission that is organising the InternationalCongress to be held in Portugal in May 2006.

The Bank’s Library continued to welcome both external and internal users who may have access tothe Bank’s extensive library resources as well as to relevant external sources in the national andinternational economic and financial fields, through adequate electronic means of information.

The Library page on the Bank’s website has made available a new service – a database withreferences to the annual reports and accounts of national and foreign corporations since the 19th

century.

The Editing and Publications Service redesigned the Bank’s publications and graphical supports.Two monographs have also been published: “Catálogo das obras impressas em Portugal nosséculos XVII e XVIII” (”Catalogue of works printed in Portugal in the 17th and 18th centuries”) and “Osrelógios do Banco de Portugal” (”The clocks of Banco de Portugal”).

The Archive continued to provide support to external research on Portuguese banking and financialhistory and to meet the internal requests.

The Museum continued to welcome a high number of visitors from schools and other entities, amongwhich representations of European Central Banks, that requested guided tours to the exhibition onthe history of money in Portugal. It also continued to expand the collection of coins and banknotesintegrating its historical assets.

A virtual visit of the permanent exhibition of the Bank’s museum was included in the Bank’s website,in www.bportugal.pt, thus reaching a wider audience.

8.10.5. Legal services

In 2005 the activity of the Legal Services continued to focus on the two main areas of intervention ofthis Department: consultation and legal studies, on the one hand, and court appearances andcontracts, on the other.

In the area of consultation and legal studies, reference should firstly be made to work developed withinthe framework of the European System of Central Banks. The legal support related to the directparticipation in the ESCB took place mainly through cooperation with the Legal Committee (LEGCO)and with the respective working group (FLEX), involving the analysis and monitoring of legal issuesincluded in the respective agenda. This activity of the Department implied regular visits to the ECBand important preparatory work. In parallel, all the necessary internal legal advice on these issueswas provided to the Board of Directors and to other Departments of the Bank, as required by theirinvolvement in ESCB operation.

As regards the legal support concerning all other Bank’s activities, the Department was consultedthroughout the year on a large number of issues, with special emphasis on those pertaining to thelegal framework of credit institutions and banking supervision, the reorganisation and winding-up of



financial institutions, the issue and circulation of the euro, monetary policy operations, paymentsystems, money laundering and the taxation of financial products and transfers.

The Department has also continued to co-operate in several ways with Portuguese official entities,namely in the preparation or transposition of Community legislation, and in the study of Communitylaw questions with a bearing on the Bank’s or the banking system’s activity submitted to thepreliminary ruling of the European Court of Justice.

In the course of the year, over five hundred written opinions were issued on the consultation and legalstudies area, as well as a significant number of informal consultations and verbal opinions.

As in previous years, the Department continued to ensure the co-ordination of the PortugueseDelegation in the Financial Action Task Force (FATF). Worthy of note was the preparation of the replyto the Mutual Evaluation Survey to be sent to FATF for assessment of the Portuguese system for theprevention and repression of money laundering and terrorism financing, with a view to the evaluationround scheduled for the first quarter of 2006. This task was carried out by three major groupsspecialising in the different subjects involved, under the co-ordination of this Department. It involveddetailed and lengthy studies, the preparation and translation of the replies to the FATF evaluationsurvey, in close co-operation with other Departments of the Bank and with several external entitiesof both the financial system and the Government. Simultaneously, a number of legislativeproposals were prepared intended to improve the Portuguese legal system in the light of the FATFRecommendations and other international instruments.

Among the internal working groups which have a participation of the Legal Services Department, 15were initiated in 2005, of which 6 have already ceased. Overall, working groups operating in the courseof the preceding year have risen from 14 (at the end of 2004) to 19 (at the end of 2005), apart from thosewithin the remit of the ESCB. There were interventions in nearly all cases not only by other Departmentsof the Bank, but also by external entities, namely financial supervisors and government bodies.

As far as court appearances and contracts are concerned, the activity of the Department focused, eitherdirectly or in co-operation with other Departments, on the preparation, revision and conclusion ofcontracts with external entities and also Bank’s employees. The court appearance on the Bank’sbehalf has also been ensured, either directly or, in some cases, through the monitoring of caseswhere the legal representation has been entrusted to external lawyers. These legal proceedings wererelated to breaches of regulations and administrative law, regarding notably banking supervision andcivil and labour matters. In the course of the year, a total of 33 legal proceedings, including those wherethe Bank intervened as a third party were initiated, vis-à-vis 19 in 2004. Among the legal proceedingsfiled against the Bank, 11 are of an administrative nature (5 in the previous year), and 3 are legalappeals against decisions applying sanctions. From total legal proceedings, 58 were pending at theend of the year (compared with 66 at the end of 2004).

Within the remit of international co-operation, the Department continued to co-operate with East Timorin the preparation of financial legislation, which in 2005 focused especially on negotiable instruments(such as cheques, bills of exchange and promissory notes). The Department participated also activelyin the preparation and organisation of a workshop intended to strengthen the system for the preventionof money laundering and terrorist financing in the Portuguese-speaking countries, sponsored by theWorld Bank. This workshop took place in Lisbon in May 2005, with the presence of representativesfrom Angola, Mozambique, Cape Verde, S. Tomé and Príncipe, Guinea-Bissau and East Timor. Onthe same occasion, and in co-operation with the Ministry of Justice, the “Reference Guide to Anti-MoneyLaundering and Combating the Financing of Terrorism” of the World Bank and the InternationalMonetary Fund was translated into Portuguese.



8.10.6. Internal audit

The internal audit function is independent from the other services and units of the Bank. Its mainresponsibilities are to assure, in an impartial manner, the effectiveness, operability and safety of itsservices, systems, processes, activities and operations. The performance of this function helps theBank fulfil its objectives at various levels, by using a systematic and disciplined way to assess andimprove the effectiveness in the risk management and internal control fields.

Even though every activity area of the Bank may be independently assessed, the audit function focusesmainly on activities, processes and systems that, in any given period, imply greater potential risk, inorder to prevent and anticipate risks and problems inherent in the complexity and fast changingenvironment that characterise the purpose and context of the activities of Banco de Portugal.

In operational terms, the annual activities in the field of internal audit consists in the implementationof an audit programme based on two plans approved by two different decision-makers: (i) an internalaudit programme approved by the Board of Directors and (ii) a programme defined at the level of theEuropean System of Central Banks (ESCB), approved by the Governing Council of the ECB. Accordingto the generally agreed practices for planning these activities, the preparation of the approved auditprogrammes was based on formal and structured methodologies for the risk assessment of allrelevant operations, activities and systems of the Bank and of the ESCB.

In addition to the programmed activities referred to above, the internal audit function also carries outspecial investigations and other works, at the request of the Board of Directors of the Bank or of theBoard of Governors of the ESCB.

The operational objectives of programmed audit actions consist in giving a reasonable degree ofassurance to the members of the Board and to the management that the several services and systemsof the Bank in the pursuance of their objectives and in the performance of their activities ensure

• The adequate identification, measurement and coverage of existing risks;

• The existence and operation of effective and efficient internal control systems;

• The reliability and integrity of the financial and operational information;

• The effectiveness and efficiency of the operations;

• The adequate security and safeguard of human, financial, technical and material assets;

• The compliance with the applicable legal, regulatory and contractual rules and obligations.

Within the framework of the programmes implemented in 2005, the core internal audit activityperformed 41 audits, of which (i) 34 exclusively at the domestic level and (ii) 7 at the level of commonor shared ESCB/Eurosystem systems.



The following table shows the breakdown of the exclusively domestic internal audits by mainintervention area of the Bank:

EXCLUSIVELY DOMESTIC INTERNAL AUDIT ACTIVITY

Main intervention areas Audits

Market and reserve management systems and operations 5

Currency issue and cash systems and operations at the Head-office, Oporto branch,regional delegations and agencies 9

Banking supervision 2

Payment systems and operations 1

Information technologies 4

Human resources management activities and administrative support 8

Accounting and financial control 3

Direct support to the Board of Directors 2

TOTAL 34

Within the scope of the audit activity programmed and carried out at the level of the ESCB and/or theEurosystem, the Audit Department was actively involved in the planning, programming, implementationand reporting of 7 audits to the following common or shared systems and/or activities:

• Exchange rate mechanism of the ESCB (ERM II);

• Eurosystem banknotes strategic stock;

• Eurosystem Euro banknotes logistical operations;

• ESCB statistical information systems, including systems for the data exchange;

• ESCB information systems security policy;

• Cebamail – ESCB e-mail system;

• Teleconference – ESCB teleconference system.

The audit reports issued at Banco de Portugal and the ESCB levels provided the management bodieswith opinions, comments, information, assessments and, whenever necessary, recommendationsintended to ensure the improvement of the activities, processes, systems, procedures and internalcontrols established.

With respect to the latter, it should be noted that the internal audit reports on the activities carried outin 2005 included 121 recommendations mainly intended to (i) reduce residual risks remaining in theaudited areas, services and systems, (ii) promote the effectiveness, efficiency and operationalsecurity, and (iii) improve IT systems supporting the Bank’s activity.

The Audit Department also monitored on a regular basis the actions and measures taken followingits recommendations issued in previous years, in order to ensure that the risks are adequatelyassessed, overcome, or assumed, whenever necessary. In this context, the main follow-up activitiesin 2005 were:

• Annual follow-up of the recommendations issued within the scope of the audits performed by theESCB/Eurosystem in previous years. This work was developed at the initiative of the ESCB’sInternal Auditors Committee (IAC);



• Follow-up of all recommendations issued within the scope of the internal audit programme of theBank from 2001 to 2003, which were deemed not to have been implemented yet by the differentservices;

• Annual follow-up of the recommendations issued within the scope of the internal audit programmeof the Bank implemented in 2004;

• Other specific follow-up initiatives addressed at the investigation of situations and recommendationsdeemed to be more critical.

Still within the scope of the activities entrusted to internal audit, the Bank developed severalsupplementary activities, primarily targeted at promoting or contributing to the enhancement of riskanalysis and internal control procedures, either inside or outside the Bank. In this area, the mainactivities were:

• Systematic supply of information to the Board of Auditors of the Bank and undertaking of severalassessments requested by this Board;

• Technical support and reporting of information to Banco de Portugal and ECB external auditors;

• Regular and systematic participation in the meetings and activities of the Internal AuditorsCommittee (IAC) and in the different working groups that support the audit activity at the ESCB level;

• Participation in several projects, commissions and working groups of the Bank, with specialemphasis on the regular participation in the Committee for IT and in the Committee for SecurityCo-ordination;

• Issue of technical opinions and supply of sundry technical support to other services of the Bank;

• Traineeships, training and advice in the field of co-operation with Portuguese-speaking Africancountries, namely with the Central Banks of S. Tomé and Príncipe, Cape Verde and Angola, topromote the development or improvement of audit good practices and culture.

8.10.7. Buildings and technical facilities

In 2005 the remodelling of our building in Ponta Delgada regional delegation was started and theredesigning of the major entrances in the head office building, in Lisbon, was concluded.

Repair works were continued in the buildings of the Braga agency, the regional delegation in Funchaland the Cash Centre in Carregado. The repairing process of the Rossio building was started.

The Bank continued to increase the reliability of the technical facilities, namely by replacing the liftsand central air-conditioning in some of the buildings in Lisbon and in Carregado.

Finally, measures were taken, intended to reduce energy consumption and expenses with operationand maintenance in the main buildings of the Bank.



9. FINANCIAL STATEMENTS

9.1. Presentation and proposal for the distribution of results

For the purposes of Article 54 of the Organic Law of Banco de Portugal, this report presents the fi nancial statements for the year 2005.

The annual accounts of the Bank were audited by external auditors, pursuant to the provisions laid down in Article 46 of the Organic Law of Banco de Portugal (see section 9.4.). In accordance with the provisions of Article 43, the Board of Auditors prepared a report and issued an opinion on the fi nancial statements (see section 9.5.). The Advisory Board reviewed and issued a favourable opinion on the Bank’s activity and accounts.

Main changes in the composition of the balance sheet

The table below shows the developments in the year-end positions of the main items of Banco de Portugal’s balance sheet since 2000:

EUR million

BALANCE SHEET OF BANCO DE PORTUGAL – Year-end positions

2000 2001 2002 2003 2004 2005

ASSETS 27,130.13 27,439.46 28,389.97 29,622.82 30,723.20 36,355.31

Gold 5,715.45 6,144.38 6,218.90 5,492.99 4,779.22 5,836.54

Financial assets denominated in foreign currency 6,674.43 7,338.05 7,377.24 3,758.86 4,183.50 3,167.16

Financial assets denominated in euro 5,915.96 5,890.05 5,943.31 9,810.23 9,860.18 11,232.28

Claims related to swaps 3,566.00 3,863.00 3,490.47 2,139.77 839.01 797.11

Monetary policy operations 3,566.00 2,168.70 1,026.80 2,492.77 2,873.02 5,392.46

Intra-Eurosystem claims 1,058.92 1,057.86 3,571.39 5,228.22 7,475.51 8,903.07

Participating interest and claims equivalent tothe transfer of foreign reserves to the ECB 1,057.76 1,057.76 1,057.76 1,057.76 1,082.11 1,082.11

Other intra-Eurosystem claims 1.16 0.10 2,513.63 4,170.46 6,393.40 7,820.96

Other claims 942.91 977.42 761.86 699.99 712.77 1,026.69

LIABILITIES AND EQUITY 27,130.13 27,439.46 28,389.97 29,622.82 30,723.20 36,355.31

Banknotes in circulation 6,186.63 5,573.08 7,992.29 9,529.66 11 386.05 12,838.88

Liabilities to credit institutions related to monetary policy 3,879.18 4,415.12 4,622.09 11,705.58 6,252.16 4,664.57

Certifi cates of deposit 3,783.56 2,939.46 2,029.49 1,053.66 - -

Liabilities related to swaps 3,618.23 3,848.87 3,488.68 2,148.69 841.87 786.28

Intra-Eurosystem liabilities 4,307.41 4,397.88 5,099.48 449.78 7,717.99 11,946.45

Other liabilities 539.80 762.58 356.63 467.00 411.55 406.76

Provisions 2,604.16 2,955.24 2,723.06 2,280.21 2,232.03 2,195.20

Revaluation differences 2,004.53 2,291.31 1,771.14 1,459.83 1,162.01 2,590.67

Capital and reserves 150.41 178.52 217.22 459.37 649.50 806.21

Profi t for the year 56.23 77.40 89.89 69.04 70.03 120.29



The change in the balances on the main items of Banco de Portugal’s balance sheet in 2005 was as follows:

EUR million

Assets Liabilities

Total assets / liabilities as at 31 December 2004 30,723.20 30,723.20

Increases (+) / Decreases (-) in 5,632.11 5,632.11

Gold 1,057.33

Financial assets denominated in foreign currency -1,016.34

Financial assets denominated in euro 1,372.10

Claims related to swaps - 41.90

Monetary policy operations 2,519.44

Intra-Eurosystem claims 1,427.56

Participating interest and claims equivalent to the transfer of foreign reserves to the ECB 0.00

Other intra-Eurosystem claims 1,427.56

Other claims 313.92

Banknotes in circulation 1,452.83

Liabilities to credit institutions related to monetary policy -1,587.59

Certifi cates of deposit 0.00

Liabilities related to swaps - 55.60

Intra-Eurosystem liabilities 4,228.46

Other liabilities - 4.79

Provisions - 36.83

Revaluation differences 1,428.66

Capital and reserves 156.71

Profi t for the year 50.26

Total assets / liabilities as at 31 December 2005 36,355.31 36,355.31

The main changes in the Banco de Portugal’s balance sheet in 2005 refl ect both the exogenous behaviour of the public and credit institutions that are counterparties of the Bank in operations related to the decentralised implementation of monetary policy and payment system functioning, and the

foreign reserve management operations, which were infl uenced by the conditions prevailing in international fi nancial markets.

The signifi cant increase in banknotes in circulation recorded in Banco de Portugal’s liabilities, essentially refl ects the 13% increase in overall circulation at the Eurosystem level and the adjustments provided for in Decision ECB/2001/15. The book-entry change in the banknote circulation of Banco de Portugal was counterbalanced by the increase in the partially remunerated intra--Eurosystem claims regarding banknote issuance (refl ected in Other intra-Eurosystem claims).

BANKNOTES IN CIRCULATION



The change in the balance on monetary policy operations (€2,519 million) basically corresponded to the increase in the volume of longer-term refi -nancing operations, which was counterbalanced by the increase in intra-Eurosystem liabilities (TARGET). The change in these liabilities also refl ects the change in actual banknotes in circulation and in deposits of credit institutions.

The change in 2005 in the overall value of assets managed by Banco de Portugal was affected by the conditions prevailing in international fi nancial markets and by decisions regarding the desirable composition of these assets.

Concerning the 2005 year-end effective exchange rate, there was a signifi cant recovery of the US dollar, while the euro depreciated, albeit to a lesser extent. Developments in the gold quotation were positive in US dollars, which, given the recovery of this currency against the euro, made the increase of the gold quotation in euro even more signifi cant. In terms of interest rates, complementary to the progressively lower accommodation of monetary policies, short-term market interest rates rose and longer-term rates increased less or even decreased (similarly to the euro), thereby showing an unusual slope of the yield curves.

These price developments in the markets determined increases in unrealised capital gains in gold operations and in most of the foreign currency portfolio. The remaining share of the foreign currency portfolio was affected by write-downs, although these were signifi cantly lower than those in 2004. The securities portfolio also recorded write-downs, in this case higher than in 2004, resulting from the developments in longer-term interest rates already referred to. According to the accounting rules of the Eurosystem, write-downs were recognised as losses for the year (see Note 25 of section 9.3. “Notes on the fi nancial statements”).

MONETARY POLICY AND INTRA-EUROSYSTEM LIABILITIES

EXCHANGE RATE DEVELOPMENTS – EUR/USD

US DOLLAR INTEREST RATES

EURO INTEREST RATES



With regard to internal portfolio management decisions, as from 2003, the Bank pursued activities aimed at reducing exchange rate risk, by signifi cantly increasing its euro trading portfolio, and since 2005, a held-to-maturity euro portfolio, included in “Other claims”. The Bank continued to carefully manage its exposure to the various foreign currencies. Under the Central Bank Gold Agreement of 26 September 1999, which was renewed in 2004, the Bank sold 45 tons of gold.

The fi nancial assets chart presented shows the effect of this shift as from 2003.

The continued reduction in swaps mainly refl ects decisions resulting from market developments that determined lower remuneration rates in this segment of active management of the gold portfolio.

In 2005, Own resources (Provisions, Revaluation differences and Capital and reserves) increased essentially as a result of the increase in positive revaluation differences. This rise in unrealised capital gains is almost entirely due to the increase in positive gold revaluation differences, despite the abovementioned sales. The increase in Own resources also includes (i) the investment of 2004 results, (ii) the building up of the reserve originating from capital gains in gold sale operations and (iii) the debtor movement in results carried forward related to liabilities for retirement and survivors pensions, pursuant to Notice of Banco de Portugal no. 4/2005, within the scope of the transition to IAS 19.

FINANCIAL ASSETS

PROVISIONS AND REVALUATION DIFFERENCES

CAPITAL AND RESERVES



Developments in the profi t and loss account

The main components of the profi t and loss account are shown as a time series from 2000 to 2005 in the table below:

EUR million

2000 2001 2002 2003 2004 2005

Total net income 297.09 316.76 289.59 469.92 421.90 345.02

of which:

Interest margin 276.39 192.97 73.58 141.03 185.07 244.99

Net result of fi nancial operations, write- downs and risk provisions 8.37 69.79 153.19 294.69 249.34 84.54

Total costs and losses (net) 240.79 239.31 183.98 365.50 324.96 224.20

of which:

Total administrative expenses 136.59 143.26 149.51 151.30 157.44 166.00

Transfers to/from other provisions and reserves 74.43 -7.66 -2.86 194.60 155.61 44.18

Net profi t/loss for the year 56.23 77.40 89.89 69.04 70.03 120.29

The net profi t/loss for 2005 amounted to €120.29 million, i.e. around €50 million higher than that recorded in 2004. With regard to net income, positive developments in the interest margin continued, as did the increase in the net result of fi nancial operations and the decrease in write-downs on fi nancial assets and positions. However, total net income shows a negative change, due to a signifi cant rise in provisions for risks (see chart below). Concerning the costs and losses, transfers to/from other provisions and reserves declined sharply, due to the combined effect of the building up of the reserve originating from capital gains in gold sale operations, with the reduction of the provision for other risks and costs.

The increase of €60 million in the interest margin in 2005 is due to the increase in interest income, which exceeded the slight rise in interest payable. This mainly refl ected the quantitative increase in remunerated assets (remunerated share of adjustments to banknotes in circulation, fi nancial assets and longer-tern refi nancing operations).

In 2005 the amount of gains/losses arising from fi nancial operations includes gains from gold sale operations as well as other realised positive gains/losses, mainly originating from foreign exchange operations. The fi rst chart presented on the next page illustrates the components of net gains/losses arising from fi nancial operations, write-downs recognised in the profi t and loss account and the in-crease in provisions for risks.

INTEREST MARGIN



Taking into consideration the prudential criteria set out in the Chart of Accounts of Banco de Portugal (Plano de Contas do Banco de Portugal - PCBP) and the overall risk positions the Bank is exposed to, year-end movements in provisions items include increases in the provision for interest rate risks and in the provision for equity price fl uctuation risks. Reference should also be made to the appropriation for the special reserve comprised by gains in gold sale operations.

Administrative expenses in 2005 increased by 5.4%, in particular staff costs that accounted for 70.3% of the total. These grew by 7%, mostly due to accounting adjustments related to the Bank’s Pension Fund, pursuant to Notice no. 4/2005 governing the transition to IAS 19 (see Note 32 of section 9.3. Notes on the fi nancial statements). Excluding charges related to the Pension Fund, staff costs grew by 1.5% and total administrative expenses rose by 1.6%, instead of 5.4% as referred to.

Supplies and services from third parties increased by 2.7%, accounting for 20.1% of total administrative expenses.

TOTAL ADMINISTRATIVE EXPENSES

EUR thousand

31/12/2005 31/12/2004 Change %

Staff costs, excluding charges with the Pension Fund 91 655 90 337 1,5%



Distribution of results

The profi t for 2004 stood at EUR 70 million and was distributed as follows:

10% to the legal reserve ......................................................................................... EUR 7,003,309.38

10% to other reserves(1) .......................................................................................... EUR 7,003,309.38

and pursuant to Article 53 (c) of the Organic Law of Banco de Portugal:

30% to other reserves .......................................................................................... EUR 21,009,928.14

50% to the State, as dividends ............................................................................. EUR 35,016,546.90

According to the provisions set forth in Article 53 (2) of the Organic Law, the net profi t for the fi scal year of 2005, to the amount of €120.29 million, shall be distributed as follows:

10% to the legal reserve ....................................................................................... EUR 12,029,442.91


and pursuant to sub-paragraph (c):


50% to the State, as dividends(2) .......................................................................... EUR 60,147,214.55

Lisbon, 7 March 2006

BOARD OF DIRECTORS

Governor


Vice-Governors

António Manuel Martins Pereira Marta

Pedro Duarte Neves

Directors

Manuel Ramos de Sousa Sebastião

Vítor Manuel da Silva Rodrigues Pessoa

José António da Silveira Godinho

(1) Income taxes paid amounted to around €26.8 million.

(2) Income tax payments are expected to amount to around €0.5 million.



9.2. Financial statements

BALANCE SHEET OF THE BANCO DE PORTUGAL

31/12/2005 31/12/2004

ASSETS Note Number

Gross assetsAccumulated depreciation

and provisionsNet assets Net assets

1 Gold and gold receivables 2 5,836,544 5,836,544 4,779,217

2 Claims on non-euro area residents denominated in foreign currency 2,912,045 2,912,045 3,753,233 2.1 Receivables from the IMF 3 263,694 263,694 405,855 2.2 Balances with banks and security investments, external loans and other external assets 4 2,648,351 2,648,351 3,347,378

3 Claims on euro area residents denominated in foreign currency 4 521,075 521,075 749,614

4 Claims on non-euro area residents denominated in euro 5 1,330,280 1,330,280 736,711 4.1 Balances with banks, security investments and loans 1,330,280 1,330,280 736,711 4.2 Claims arising from the credit facility under ERM II

5 Lending to euro area credit institutions related to mon etary policy operations denominated in euro 6 5,392,459 5,392,459 2,873,023 5.1 Main refi nancing operations 190,800 5.2 Longer-term refi nancing operations 5,392,459 5,392,459 2,682,223 5.3 Fine-tuning reverse operations 5.4 Structural reverse operations 5.5 Marginal lending facility

6 Other claims on euro area credit institutions denominated in euro 740 740 955

7 Securities of euro area residents denominated in euro 5 10,432,407 10,432,407 9,642,172

8 General government debt denominated in euro

9 Intra-Eurosystem claims 7 8,903,072 8,903,072 7,475,507 9.1 Participating interest in ECB 99,779 99,779 99,779 9.2 Claims equivalent to the transfer of foreign reserves to the ECB 982,331 982,331 982,331 9.3 Claims related to TARGET accounts (net) 9.4 Net claims related to the allocation of euro banknotes within the Eurosystem 7,815,368 7,815,368 6,384,422 9.5 Claims related to other operational requirements within the Eurosystem 5,594 5,594 8,975

10 Items in course of settlement 245 245 61

11 Other assets 1,290,320 263,878 1,026,442 712,710 11.1 Coins of euro area 38,909 38,909 34,403 11.2 Tangible and intangible fi xed assets 8 238,525 140,383 98,142 101,993 11.3 Other fi nancial assets 9 385,172 29,147 356,025 94,183 11.4 Off-balance sheet instruments revaluation differences 10 13,414 13,414 24,742 11.5 Accruals and prepaid expenses 11 323,898 323,,898 192,892 11.6 Sundry 12 290,401 94,348 196,054 264,497

Total depreciation 140,383 Total provisions 123,495

Total assets 36,619,188 263,878 36,355,309 30,723,203

OFF-BALANCE SHEET INSTRUMENTS 31/12/2005 31/12/2004

Collateral received 1,380,025 1,593,275 Forward foreign exchange and interest rate transactions – purchases 32 524,869 809,501 Forward foreign exchange and interest rate transactions – sales 32 524,869 809,501 Other forward transactions – purchases 32 954,570 Other forward transactions – sales 32 Securities and other items held in custody 21,996,704 20,183,584



Note: Totals/subtotals included in the fi nancial statements and respective notes may not add up, due to rounding and since fi gures are presented in

EUR thousand.

AS AT 31 DECEMBER 2005 EUR thousand

31/12/2005 31/12/2004

LIABILITIES Note Number

1 Banknotes in circulation 13 12,838,881 11,386053

2 Liabilities to euro area credit institutions related to monetary policy operations denominated in euro 14 4,664,567 6,252,158 2.1 Current accounts 4,664,567 6,252,158 2.2 Deposit facility 2.3 Fixed-term deposits 2.4 Fine-tuning reverse operations

3 Other liabilities to euro area credit institutions denominated in euro 14 113,379 109,562

4 Debt certifi cates issued

5 Liabilities to other euro area residents denominated in euro 15 887 1,454 5.1 General government 58 174 5.2 Other liabilities 829 1,280

6 Liabilities to non-euro area residents denominated in euro 16 425,789 418,696

7 Liabilities to euro area residents denominated in foreign currency 17 38,067 32,969

8 Liabilities to non-euro area residents denominated in foreign currency 17 222,218 287,157 8.1 Deposits, balances and other liabilities 222,218 287,157 8.2 Liabilities arising from the credit facility under ERM II

9 Counterpart of special drawing rights allocated by the IMF 3 64,512 60,763

10 Intra-Eurosystem liabilities 7 11,946,447 7,717,986 10.1 Liabilities related to promissory notes backing the issuance of ECB debt certifi cates 10.2 Liabilities related to TARGET accounts (net) 11,930,781 7,704,645 10.3 Net liabilities related to the allocation of euro banknotes within the Eurosystem 10.4 Liabilities related to other operatonal requirements within the Eurosystem 15,667 13,341

11 Other liabilities 328,186 342,824 11.1 Off-balance sheet instruments revaluation differences 10 2,545 5,512 11.2 Accruals and income collected in advance 18 70,720 54,151 11.3 Sundry 19 254,920 283,160

12 Provisions 20 2,195,199 2,232,032

13 Revaluation accounts 21 2,590,673 1,162,013

14 Capital and reserves 22 806,210 649,502 14.1 Capital 1,000 1,000 14.2 Reserves 805,210 648,502

15 Profi t for the year 120,294 70,033

Total equity and liabilities 36,355,309 30,723,203

HEAD OF THE CONTROL AND ACCOUNTING DEPARTMENT

Vítor Pimenta e Silva



Note: Totals/subtotals included in the fi nancial statements and respective notes may not add up, due to rounding and since fi gures are presented in EUR thousand.

EUR thousand

PROFIT AND LOSS ACCOUNT

ITEMS Note Number 31/12/2005 31/12/2004

1 Interest income 614,060 495,645

2 Interest expense 369,074 310,577

3 Net interest income 23 244,985 185,068

4 Realised gains/losses arising from fi nancial operations 24 230,126 210,471

5 Write-downs on fi nancial assets and positions 25 35,725 43,211

6 Transfer to/from provisions for risks 20 -109,857 82,084

7 Net result of fi nancial operations, write-downs and risk provisions 84,544 249,344

8 Fees and commissions income 4,284 4,284

9 Fees and commissions expense 2,819 3,199

10 Net income from fees and commissions 1,465 1,084

11 Income from equity shares and participating interests 26 2,771 2,271

12 Net result of pooling of monetary income 27 5,594 -24,707

13 Other income 28 5,660 8,836

14 Total net income 345,019 421,897

15 Staff costs 29 116,721 109,006

16 Supplies and services from third parties 33,372 32,480

17 Other administrative expenses 884 960

18 Depreciation for the year 8 15,027 14,998

19 Total administrative expenses 166,004 157,444

20 Banknote production services 12,564 3,297

21 Other expenses 28 1,447 8,613

22 Transfer to/from other provisions and reserves 20 44,181 155,607

23 Total costs and losses (net) 224,196 324,961

24 Income tax 30 529 26,903

25 Net Profi t/Loss for the year 120,294 70,033

Profi t distribution Proposal for 2005 2004

Net Profi t/Loss for the year 120,294 70,033 Distribution :

to reserves– 60,147 35,017

to the State– 60,147 35,017

HEAD OF THE CONTROL AND ACCOUNTING DEPARTMENT

Vítor Pimenta e Silva



9.3. Notes on the fi nancial statements (Values presented in EUR thousand)

NOTE 1 | BASES OF PRESENTATION AND MAIN ACCOUNTING POLICIES

1.1 Bases of presentation

The fi nancial statements of Banco de Portugal (hereinafter called “Bank”) have been drawn up in accordance with the Chart of Accounts of Banco de Portugal (PCBP).

With regard to the accounts related to the main operating areas of the Bank, the PCBP covers the principles, criteria and techniques set out by the European Central Bank (ECB) for the European System of Central Banks (ESCB), in order to ensure consistency, reliability and comparability of accounting data reported by the national central banks (NCBs) of the Member States.

Although the PCBP does not provide for specifi c rules on the accounting registration of certain transactions nor on the items to be recorded in the annex to the balance sheet and to the profi t and loss account, the Board of Directors, when reporting on the fi nancial position of the Bank and its profi t/loss and operations, complies with the applicable ECB recommendations and with the principles and practices generally accepted in Portugal for the fi nancial sector, to the extent that such principles and practices are deemed appropriate within the framework of the central bank’s tasks and responsibilities. Thus, the fi nancial statements of the Bank may disclose fewer details on its assets, liabilities, responsibilities, contingencies and risks than those of commercial fi nancial institutions.

Holdings in subsidiaries are recorded in the fi nancial statements, as described in section 1.2 h) of this Note. Given the immaterial amount of the results of a consolidation process, the Bank does not prepare consolidated fi nancial statements.

In addition, as regards the accounting of liabilities for retirement and survivors pensions, stress should be laid on the adoption – with reference to 31 December 2004 – of the provisions set forth in Notice of Banco de Portugal no. 4/2005, within the scope of the transition to IAS 19. Hence, the Banco de Portugal’s Pension Fund Management Company (SGFP) recalculated liabilities as at 31 December 2004 and the Bank fi nanced this increase in liabilities in order to maintain the coverage level of previous fi scal years.

1.2 Synopsis of the main accounting policies

The main accounting policies and valuation criteria used in the preparation of the fi nancial statements for the year 2005 were the following:

a) Accrual basis of accounting

The Bank follows the accruals principle of accounting in relation to the majority of the fi nancial statement items, namely with regard to interest on lending and deposit operations, which is recognised in the accounting period in which it is earned and not according to the period in which it is received.



b) Recognition of gains and losses in fi nancial operations

Realised gains and losses arising from fi nancial operations are taken to the profi t and loss account on the settlement date.

In the course of the year revaluation differences (difference between the market value and the weighted average cost) are registered in the balance sheet, in a specifi c revaluation account for each type of asset.

At the end of the year negative revaluation differences are recognised in results as “Write-downs”.

Revaluation differences in any one security or currency are not netted against each other.

c) Conversion of assets, liabilities, off-balance sheet instruments and profi t and loss denominated in foreign currency

Assets, liabilities and off-balance-sheet instruments denominated in foreign currency are converted into euro at the exchange rate prevailing on the balance sheet date. Income and expenses denominated in foreign currency are, in turn, converted at the exchange rate prevailing on the settlement date of each transaction.

d) Foreign currency transactions

The calculation of foreign exchange gains or losses is made on a currency-by-currency basis by reference to the respective weighted average cost, which is computed from the “daily net cost” method.

This method implies that the average exchange rate of each foreign currency is changed only when the amount purchased on a given day is higher than the amount sold. The result of sales is determined by the differential between the transaction value and the average cost of the day.

Where the amounts sold are higher than those purchased, the average cost of the day is determined by two components: day purchases (at the transaction value) plus the differential between day sales and purchases (at the historical weighted average cost). Where a liability position exists in respect of a foreign currency, the reverse treatment shall apply. Therefore, the average cost of the liability position shall be recorded by net sales, while net purchases are entered in results.

Spot and forward foreign exchange transactions and currency swaps are recorded as follows:

Foreign exchange spot transactions

Spot purchases and sales of foreign currency are recorded on the settlement date, which is when the weighted average cost of the currency position is calculated;

Spot purchases of foreign currency against the sale of euro are recorded at the transaction’s exchange rate;

Spot purchases of foreign currency against the sale of another foreign currency are recorded in euro, through the use of the spot exchange rate on the contract date of the transaction’s currency;

In spot sales of foreign currency against euro the operation’s foreign exchange gains and losses arise from the difference between the equivalent of the transaction in euro and the average cost of the foreign currency sold;

In spot sales of foreign currency against the purchase of another foreign currency, the operation’s foreign exchange gains and losses arise from the difference between the equivalent in euro of the transaction’s currency at the transaction’s exchange rate and the average cost of the foreign currency sold.

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Foreign exchange forward transactions

These transactions are recognised in off-balance-sheet accounts from the contract date to the settlement date at the spot rate prevailing on the contract date;

Forward purchases of foreign currency against the forward sale of another foreign currency are recorded in euro through the use of the spot exchange rate on the contract date of the transaction’s currency. The difference between the spot and the forward equivalents is treated as interest payable/receivable on an accruals basis up to the settlement date of the transaction. The weighted average cost of the currency position is computed two days after the contract date of the transaction;

In forward sales of foreign currency foreign exchange gains and losses arise from the difference between the equivalent in euro, at the spot rate, of the transaction’s currency and the weighted average cost of that currency, and are entered in the respective profi t and loss account on the date on which the purchase affects the acquisition cost. The difference between the spot and forward equivalents is treated as interest payable/receivable on an accruals basis up to the settlement date of the transaction.

Foreign exchange swaps

Foreign exchange swaps involve the simultaneous spot purchase/sale of one currency against another and forward sale/purchase of the same amount of this currency against the other.

Spot purchases/sales are treated as foreign exchange spot transactions (in balance-sheet accounts); forward purchases/sales are treated as forward foreign exchange transactions and recognised in off-balance-sheet accounts from the contract date to the maturity date at the spot rate prevailing on the former;

The difference between the spot and forward rates is treated as interest payable/receivable on an accruals basis over the life of the transaction;

The weighted average cost of each foreign currency position is not recorded since currency infl ows and outfl ows occur simultaneously and for the same value;

There are no revaluation differences in foreign currency positions since they are derived from the spot and forward currency positions as a whole.

e) Gold

Gold is entered in the accounts at market price.

The accounting treatment of gold is similar to that of foreign currencies referred to in d) above. In sum, the average cost of the gold stock is only changed when the amount purchased on a given day is higher than the amount sold. Proceeds from the sales are derived from the difference between the transaction value and the weighted average cost.

The method for the recognition of profi t/loss is also equal to that of foreign currency transactions.

f) Securities

The portfolio of marketable securities is valued at market price.

The calculation and recognition of profi t/loss in marketable securities complies with the weighted average cost criterion for each type of security. According to this method, acquisition costs on a daily basis are added to the weighted average cost of each specifi c security, so that a new weighted average cost can be calculated. Sales are deducted from the stock by applying the last weighted average cost. The difference between the value of the sales and the weighted average acquisition cost plus the

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•

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–

–

–



corresponding premium or discount, by type of security, is treated as realised gain or loss. In turn, the premium or discount paid before the sale is also treated as realised gain or loss (interest).

Revaluation differences are measured by the difference between the weighted average cost of the stock, plus the corresponding premium or discount, and the respective market value and treated as referred to in b) above.

In 2005 Banco de Portugal set up a portfolio of securities, held to maturity, classifi ed as fi nancial fi xed assets (see Note 9). These securities are valued at the historical weighted average cost, this average purchase cost being calculated in a totally independent manner from the remaining securities classifi ed as trading securities.

The portfolio of non-marketable securities is entered at historical cost. A provision is made for permanent estimated depreciations of these assets, which is calculated on a straight-line basis (see Note 9).

g) Repos and reverse repos

Repos and reverse repos involve the sale or repurchase of funds, collateralised by securities temporarily pledged or received as a guarantee.

Securities sold under a repurchase agreement remain on the balance sheet of the Bank and are treated as if they had remained part of the portfolio from which they were sold. Liabilities for the amounts received in repos are recorded on the liabilities side of the Bank’s balance sheet, including interest, which is recorded as a cost on an accrual basis.

The lending of funds through reverse repos is recorded on the assets side of the Bank’s balance sheet, being treated as a loan, and the interest is recognised on an accrual basis.

h) Participating interests

Participating interests of a long-standing nature, whose maintenance is of particular interest to the Bank’s activity, are recorded in the fi nancial statements under other fi nancial assets. Participating interests are recorded according to the cost criterion less the provisions deemed adequate.

i) Banknotes in circulation

The ECB and the 12 NCBs, which together comprise the Eurosystem, have issued euro banknotes since 1 January 2002(3). The total value of euro banknotes in circulation is allocated on the last working day of each month in accordance with the “banknote allocation key”(4).

The ECB has been allocated a share of 8% of the total value of euro banknotes in circulation, whereas the remaining 92% has been allocated to NCBs according to their weightings in the capital key of the ECB. The share of euro banknotes allocated to each NCB is disclosed under the balance sheet liability item “Banknotes in circulation”.

The difference between the value of euro banknotes allocated to each NCB in accordance with the banknote allocation key and the value of the euro banknotes actually put into circulation gives rise to remunerated intra-Eurosystem balances. These claims or liabilities, which incur interest(5), are disclosed under the sub-item “Intra-Eurosystem: Net claim/liability related to the allocation of euro banknotes within the Eurosystem” (see section 1.2 j) of this Note).

(3) ECB Decision, of 6 December 2001, on the issue of euro banknotes (ECB/2001/15), OJ L337 of 20.12.2001, pp. 52-54.

(4) “Banknote allocation key” means the percentages that result from taking into account the ECB’s share in the total euro banknote issuance and applying the subscribed capital key to the NCBs’ share in this total.

(5) ECB Decision , of 6 December 2001, on the allocation of monetary income of the national central banks of participating Member States from the fi nancial year 2002 (ECB/2001/16), OJ L337 of 20.12.2001, pp. 55 -61.



From 2002 to 2007 intra-Eurosystem balances arising from the allocation of euro banknotes will be adjusted in order to avoid signifi cant changes in NCBs’ relative income positions as compared to previous years. These adjustments are based on the difference between the average value of banknotes in circulation of each NCB in the period from July 1999 to June 2001 and the average value of banknotes that would have been allocated to them during that period under the ECB’s capital key. The adjustments will be reduced in annual stages until the end of 2007. After this date, income on banknotes will be allocated fully in proportion to the NCBs’ paid-up shares in the ECB’s capital.

The interest income and expense on these balances is cleared through the accounts of the ECB and disclosed under “Net interest income”.

The Governing Council of the ECB has decided that the seigniorage income from the ECB which arises from the 8% share of euro banknotes allocated to the ECB shall be distributed separately to the NCBs in the form of an interim distribution of profi t(6). It shall be distributed in full unless the ECB’s net profi t for the year is less than its income earned on euro banknotes in circulation and subject to any decision by the Governing Council to reduce this income in respect of costs incurred by the ECB in connection with the issue and handling of euro banknotes.

With respect to 2005, the Governing Council decided that the full amount of such income should be retained by the ECB with the purpose of establishing a provision for foreign exchange rate, interest rate and gold price risks.

j) Intra-ESCB balances

The Banco de Portugal’s share in the capital of the ECB and the position on the foreign reserve assets transferred to the ECB result from applying the weightings referred to in Article 29 of the Statute of the ESCB and of the ECB.

The intra-Eurosystem balances arising from banknote issuance are included as a single net position under “Net claims/liabilities related to the allocation of euro banknotes” (see Note 1.2 i) Banknotes in circulation).

The balances on TARGET accounts represent the net position of the clearing system of all TARGET settlement accounts of the NCBs of the ESCB against the ECB’s settlement account.

k) Provisions

In accordance with Article 5 (2) of the Organic Law of Banco de Portugal, the Board of Directors may establish other reserves and provisions to meet depreciation risks or losses to which certain types of assets or operations are particularly exposed.

Provisions for depreciation of specifi c assets are recorded in the balance sheet and deducted from the book value of these assets. The amounts assigned to these provisions result from the best estimate of the losses associated with each class of asset, on the basis of the market values or, in their absence, the expected market values.

The remaining provisions for future contingency risks are recorded on the liabilities side. The amounts of these provisions take into account not only the appropriate prudential management criteria, within the framework of central bank responsibilities, but also the degree of volatility of the Bank’s main assets.

(6) ECB Decision , of 21 November 2002, on the distribution of the income of the European Central Bank on euro banknotes in circulation to the national central banks of the participating Member States (ECB/2002/09), OJ L323, of 28.11.2002, pp. 49-50.



Therefore, the following maximum reference limits were established, as set out in the PCBP:

Provision for gold fl uctuation risks – 30% of the gold value at market price;

Provision for exchange rate risks – 25% of the overall exchange rate risk position;

Provision for securities valuation risks – 5% of the securities’ value at market price;

Provision for interest rate risks – 2% of the value of remunerated on-balance-sheet liabilities denominated in euro.

In addition, total gains in gold sale operations are transferred on a yearly basis to the reserve relating to these gains, according to the provisions set forth in Article 53 (1) (b) of the Organic Law of Banco de Portugal, and therefore no reference upper limit was established.

I) Tangible and intangible fi xed assets and assets under construction

Tangible and intangible fi xed assets are valued at the acquisition cost less depreciation.

Depreciation is calculated on a straight-line basis, according to the constant quote method, by applying to the historical cost the maximum annual rates allowed for tax purposes, which refl ect the estimated useful life of the asset namely:

Number of years

Tangible assets

Buildings and other constructions 10 a 50

Premises 4 a 20

Equipment

Machinery and tools 4 a 10

Computer equipment 4 a 5

Transport equipment 4 a 6

Furniture and fi ttings 4 a 10

Computer software 3

Intangible assets 10

Assets under construction are valued at the total costs already charged to the Bank and transferred to tangible assets when their effective use starts, and hence their depreciation.

m) Retirement pensions

Banco de Portugal ensures through the Pension Fund the right to presumable disability, disability and early retirement pensions, as well as survivors pensions; it also ensures the right to supplementary benefi ts, to a death grant and the settlement of inherent charges in the payment of pensions, specifi cally those due as contributions to the health system (SAMS) (see Note 32).

The recognition of costs and liabilities with retirement pensions is made in accordance with the provisions set forth in Notice of Banco de Portugal no. 4/2005 of 28 February, within the scope of the adoption of IAS 19.

According to the provisions laid down therein, the amount recorded in Staff costs refers to the cost of the current service, interest costs and the expected income from the Pension Fund’s assets.

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Actuarial gains and losses result from (i) differences between actuarial and fi nancial assumptions used and the values actually recorded and from (ii) changes introduced in actuarial and fi nancial assumptions as well as in the general conditions of pension plans.

Actuarial gains and losses are recorded in an item under “Fluctuation of values”, up to the maximum value of: 10% of the value of liabilities for pensions paid and liabilities for past services of staff in active employment as at the end of the current fi scal year or 10% of the value of the assets of the Pension Fund as at the end of the current fi scal year. The part that exceeds this limit is recorded under prepaid expenses or income respectively, whether it refers to losses or gains, of which 10% is linearly amortised over the average life expectancy of employees participating in the Fund.

n) Income taxes

Charges with income taxes are calculated in accordance with the provisions laid down in the Corporate Income Tax Code and the tax incentives and benefi ts applicable to the Bank.

When there are signifi cant temporary differences between the balance sheet value of assets and liabilities and the value of assets and liabilities considered for tax purposes, the Bank records the corresponding deferred taxes. Deferred taxes recorded on the assets side are recognised only to the extent of the deferred taxes recorded on the liabilities side.

o) Derivative fi nancial instruments

Derivative fi nancial instruments are revalued at the market value or, failing this, at the estimated market value. The revaluation differences are treated as described in section 1.2 b) of this Note, on an item-by-item basis.



NOTE 2 | GOLD AND GOLD RECEIVABLES

31/12/2005 31/12/2004

Oz.o.f.(*) EUR thousands Oz.o.f.(*) EUR

thousands

Gold in storage at the Bank 5,551,053.77 2,413,909 5,551,053.77 1,785,008

Gold sight accounts 5,166,231.73 2,246,567 5,054,152.18 1,625,223

Gold term deposits 384,023.67 166,995 1,600,266.33 514,585

Gold related to swap operations 2,320,475.38 1,009,073 2,657,032.21 854,401

Gold reserve 13,421,784.56 5,836,544 14,862,504.50 4,779,217

(*) 1 ounce of fi ne gold = 31.103481 grams of fi ne gold (Oz.o.f.).

On 31 December 2005 gold was valued at the market price of €434.86 per ounce of fi ne gold (2004: €321.56), with a reduction of 45 tons in the physical stock when compared to the end of the previous fi scal year. This reduction resulted from sales made under the “Central Bank Gold Agreement”, signed in September 1999 and renewed in March 2004, to prevail from September 2004 to September 2009, and aimed at diversifying the composition of the Bank’s foreign reserve assets (see Notes 22 and 24).

However, in contrast to this reduction in the physical stock quantities, the value in euro of the gold reserve as at 31 December 2005 is higher than that recorded in December 2004, as a result from positive developments in the quotation in euro. The increase in this quotation resulted (i) from the rise in the quotation of the ounce of fi ne gold in US dollars, from USD 438 on 31 December 2004 to USD 513 on 31 December 2005 and (ii) from the 13% depreciation of the euro against the US dollar.

Gold related to swap operations refers to gold temporarily transferred against cash received in USD and euro. These transactions are recorded as repo operations (see section 1.2 g) of Note 1).

Given the volatility of the world market price of gold, the Bank has set up a provision for gold fl uctuation risks within the limits defi ned in section 1.2 k) of Note 1, which is included in “Provisions” on the liability side of the balance sheet (see Note 20). This provision, after the reduction in 2005 as a consequence of the sale of 45 tons of gold, represented on 31 December 2005 a coverage rate of 10.6 per cent (14.4 per cent in December 2004).

NOTE 3 | LENDING AND DEPOSIT OPERATIONS WITH THE INTERNATIONAL MONETARY FUND (IMF)

31/12/2005 31/12/2004

Quota in the IMF 1,049,467 988,489

IMF holdings (878,158) (665,624)

Reserve position in the IMF 171,309 322,865

Holdings of SDR 87,083 75,500

Other claims against the IMF 5,302 7,491

Claims on the IMF 263,694 405,855

Allocation of SDR by the IMF (64,512) (60,763)

Liabilities to the IMF (64,512) (60,763)



The reserve position in the IMF represents Portugal’s quota in the IMF (SDR 867,400,000) deducted from IMF holdings in the Bank.

Claims on the IMF include the holdings of Special Drawing Rights (SDR) and the contribution from Banco de Portugal to the PRGF (Poverty Reduction & Growth Facility), a long-term lending facility provided to poor countries, to the amounts of SDR 71,975,505 and SDR 4,382,000 respectively.

The liability item “Allocation of special drawing rights by the IMF” comprises the allocation of SDR 53,320,000.

It should be noted that he signifi cant reduction in “Claims on the IMF” is due to the increase in the liability component of the reserve position – IMF holdings, although this reduction was partly offset by the appreciation of this currency unit in comparison to 31 December 2004.

NOTE 4 | BALANCES WITH BANKS, SECURITY INVESTMENTS AND OTHER ASSETS DENOMINATED IN FOREIGN CURRENCY

31/12/2005 31/12/2004

Balances with banks and security investments, external loans and other external assets denominated in foreign currency

Demand deposits with non-euro area residents 85,161 128,450

Securities of non-euro area residents 2,083,507 2,294,760

Investments with non-euro area residents 479,684 924,167

2,648,351 3,347,378

Claims on euro area residents denominated in foreign currency

Demand deposits with euro area residents 3 12

Investments with euro area residents 521,073 749,602

521,075 749,614

Total security investments denominated in foreign currency 2,083,507 2,294,760

Total balances with banks and other loans and assets denominated in foreign currency 1,085,920 1,802,231

Balances with banks, security investments and other investments in foreign currency at the end of 2005 are chiefl y denominated in Danish krone (DKK), Swedish krona (SEK), Canadian dollar (CAD), US dollar (USD) and pound sterling (GBP).

Investments with euro area and non-euro area residents denominated in foreign currency refer mostly to fi xed-term deposits.

Security investments denominated in foreign currency are broken down by type of debt instrument, as follows:

31/12/2005 31/12/2004

Securities of non-euro area residents denominated in foreign currency

Treasury bills 769,967 852,644

Treasury bonds 1,126,658 1,323,612

Fixbis 186,882 118,498

Other securities – 7

2,083,507 2,294,760



NOTE 5 | BALANCES WITH BANKS, SECURITY INVESTMENTS AND OTHER ASSETS DENOMINATED IN EURO

31/12/2005 31/12/2004

Claims on non-euro area residents denominated in euro

Security investments of non-euro area residents denominated in euro – 115,275 Balances with banks and other investments denominated in euro

1,330,280 621,436

1,330,280 736,711

Securities of euro area residents denominated in euro 10,432,407 9,642,172

11,762,688 10,378,883

Total security investments denominated in euro 10,432,407 9,757,447

Total balances with banks and other loans and assets denominated in euro 1,330,280 621,436

Securities denominated in euro are broken down as follows:

31/12/2005 31/12/2004

Securities of non-euro area residents denominated in euro

Fixbis – 115,275

– 115,275

Securities of euro area residents denominated in euro

Treasury bills 7,850,355 6,059,547

Treasury bonds 2,460,428 3,582,625

Sundry 121,624 –

10,432,407 9,642,172

10,432,407 9,757,447

NOTE 6 | LENDING TO EURO AREA CREDIT INSTITUTIONS RELATED TO MONETARY POLICY OPERATIONS DENOMINATED IN EURO

Since the end of June 2000 the main refi nancing operations of the Eurosystem, composed of reverse repo transactions collateralised by eligible assets, started to be conducted as variable rate tenders, using the multiple rate auction technique, with a minimum bid rate set by the ECB. These operations provide the bulk of refi nancing to the banking system, and since the allotment of 10 March 2004, with the changes introduced in applicable regulations, they have a maturity of one week (previously they were conducted with a weekly frequency and a maturity of two weeks). As at 31 December 2005 there was no main refi nancing operation outstanding (the average weighted rate of the operation carried forward was 2.16% on 31 December 2004).

Longer-term refi nancing operations have a monthly frequency and normally a maturity of three months. They are also reverse repo transactions collateralised by eligible assets and are conducted as variable rate tenders. In 2005 there was an increase of €2,710 thousand from the previous year. The average weighted rates of operations outstanding stood between 2.19% and 2.45% on 31 December 2005 and between 2.10% and 2.14% on 31 December 2004.



NOTE 7 | INTRA-EUROSYSTEM CLAIMS AND LIABILITIES

Participating interest in the ECB

Pursuant to Article 28 of the Statute of the ESCB, the ESCB national central banks are the sole subscribers to the capital of the ECB. Subscriptions depend on shares which are fi xed in accordance with Article 29.3 of the Statute of the ESCB and which must be adjusted every fi ve years.

In this context, the share that Banco de Portugal holds in the subscribed capital of the ECB (€5,56 billion) is 1.7653%, corresponding to an amount of €98,233 thousand.

As a result of the capital key change in 2004, this item also refl ects the amount of €1,546 thousand corresponding to the net increase of Banco de Portugal’s share in the accumulated net profi ts of the ECB.

Claims equivalent to the transfer of foreign reserve assets

In accordance with the ECB Guideline of 3 November 1998 on the “Composition, valuation and modalities for the initial transfer of foreign reserve assets and the denomination and remuneration of equivalent claims”, approved on 3 November 1998, as amended on 16 November 2000 (ECB/2000/15), in early 1999 Banco de Portugal transferred reserves equivalent to €961,600 thousand consisting of USD, JPY and gold (XAU).

As a result of the capital key changes in 2004, the euro-denominated claim of Banco de Portugal arising from the transfer of foreign reserve assets is €982,331 thousand.

In spite of the transfer to the ECB, the NCBs continue to manage these foreign reserve assets on behalf of the ECB. These represent the Banco de Portugal claims arising from the transfer of foreign reserve assets to the ECB. The claims are denominated in euro at a value fi xed at the time of their transfer and are remunerated at the latest available marginal rate for the Eurosystem’s main refi nancing operations, adjusted to refl ect a zero return on the gold component.

Net claims related to the allocation of euro banknotes within the Eurosystem

“Net claims related to the allocation of euro banknotes” refers to the asset position of Banco de Portugal regarding the allocation of euro banknotes within the Eurosystem (see sections 1.2 i) and 1.2 j) of Note 1).

Claims related to other operational requirements within the Eurosystem

On 31 December 2005 “Claims related to other operational requirements within the Eurosystem” refer to (i) the result of the calculation method applied to monetary income of 2005 (€5,591 thousand) and (ii) adjustments to the result of monetary income of 2004 (€3 thousand). These amounts were settled on 31 January 2006.

Liabilities related to TARGET accounts

On 31 December 2005 “Liabilities related to TARGET accounts (net)” show a liability position of €11,930,781 thousand, which comprises all TARGET positions.



Liabilities related to other operational requirements within the Eurosystem

On 31 December 2005 “Liabilities related to other operational requirements within the Eurosystem” refers exclusively to the seigniorage income of the ECB received in the fi rst three quarters of 2005 and, in accordance with the decision of the Governing Council of the ECB of 15 December 2005, entirely returned on the second working day of 2005, with the purpose of establishing an ECB provision against foreign exchange rate, interest rate and gold price risks.

NOTE 8 | TANGIBLE AND INTANGIBLE FIXED ASSETS

31/12/2005 31/12/2004

Tangible fi xed assets

Land 8,851 8,851

Buildings and other constructions 76,327 74,371

Premises 60,857 56,610

Equipment 66,548 69,115

Computer software 14,008 9,584

Museum and art collections 7,112 7,002

233,704 225,533

Intangible fi xed assets

Costs with rented buildings 38 38

Assets under construction

Tangible assets under construction 4,515 8,362

Advances 2694 31

4,784 8,392

Total gross tangible and intangible fi xed assets 238,525 233,963

Accrued amortisations

Depreciation of tangible fi xed assets (140,364) (131,955)

Depreciation of intangible fi xed assets (19) (15)

(140,383) (131,970)

Total net tangible and intangible fi xed assets 98,142 101,993



During the year ended on 31 December 2005 the movements in this item were as follows:

31/12/2004Net

balanceAdditions Disposals Depreciation

for the year

31/12/2005Net

balance

Tangible fi xed assets

Land 8,851 – – – 8,851

Buildings and other constructions 49,516 1,957 – 2,465 49,008

Premises 12,318 4,467 23 2,962 13,800

Equipment 13,455 3,942 99 6,731 10,566

Computer software 2,437 4,431 – 2,865 4,003

Museum and art collections 7,002 110 – – 7,112

93,578 14,906 122 15,023 93,339

Intangible fi xed assets

Costs with rented buildings 22 – – 4 19

Assets under construction

Tangible assets under construction 8,362 7,142 10,989 – 4,515

Advances 31 239 – – 269

8,392 7,381 10,989 – 4,784

101,993 22,287 11,111 15,027 98,142

NOTE 9 | OTHER FINANCIAL ASSETS

31/12/2005 31/12/2004

Holdings in non-euro area resident entities

Participating interest in the Bank for International Settlements 21,650 12,920

Participating interest in euro area resident entities

In Finangeste 36,425 36,425

In the Pension Fund Management Company of the Banco de Portugal 1,126 1,125

In Valora 375 375

In Swift 42 24

Domestic securities of euro area residents denominatedin euro – 72,462

Financial fi xed assets 325,554 –

385,172 123,330

Provisions for holdings in euro area resident entities (29,147) (29,147)

356,025 94,183

The increase in the participating interest in the Bank for International Settlements refl ects the purchase of 564 shares, as part of the capital increase in May 2005.

The participating interest in Finangeste is covered by a provision for capital losses to the amount of €29,147 thousand (see Note 20).



Within the scope of the Banco de Portugal’s own fund management, a medium to long-term investment portfolio was set up in November 2005. Given its characteristics – investments held to maturity – this portfolio is recorded under Other fi nancial investments – “Financial fi xed assets”. As at 31 December 2005 this item shows a total of €325,554 thousand and is essentially comprised of Treasury bonds (around 50 per cent of the portfolio) and other bonds.

NOTE 10 | OFF-BALANCE SHEET INSTRUMENT REVALUATION DIFFERENCES

31/12/2005 31/12/2004

Other forward transactions

Price revaluation differences – 476

Purchase price and adjustments 94 –

Interest rate swaps

Price revaluation differences 13,230 24,266

Accumulated write-downs from previous fi scal years (2,455) (5,512)

Net balance sheet variations 10,869 19,230

The value recorded under “Net balance sheet variations” refl ects the difference between asset and liability items of “Balance sheet variations from off-balance-sheet instruments”. Therefore, the value of €10,869 thousand relating to 31 December 2005 represents the difference between €13,414 thousand recorded under assets (31 December 2004: €24,742 thousand) and €2,545 thousand recorded under liabilities (31 December 2004: €5,512 thousand).

The decrease in the net value of interest rate swaps is essentially due to the maturing in the course of the year of several operations outstanding on 31 December 2004.

NOTE 11 | ACCRUALS AND PREPAID EXPENSES

31/12/2005 31/12/2004

Accruals

Interest and other income receivable from transactions denominated in foreign currency 27,873 25,938

Interest and other income receivable from transactions denominated in euro 111,144 101,405

139,017 127,342

Prepaid expenses

Prepaid expenses from transactions denominated in foreign currency 1,601 3,245

Prepaid expenses from transactions denominated in euro 19,285 15,235

Multi-annual projects – specialised services 3,736 7,560

Other prepaid expenses 160,259 39,510

184,881 65,549

323,898 192,892



Accruals refer essentially to the accrued interest on securities denominated in foreign currency and euro (€22,450 thousand and €43,871 thousand respectively), interest on the net position mentioned in section 1.2. j) of Note 1 related to the issuance of banknotes (€31,480 thousand), the remuneration of the relative position relating to foreign reserve assets transferred to the ECB (€17,536 thousand) and interest receivable from longer-term refi nancing operations outstanding on 31 December 2005 (€13,108 thousand – see Note 6).

Prepaid expenses refer essentially to the interest accrued up to the purchase date of coupon bearing securities, which were paid to the counterpart upon purchase and which will be received by the Bank at the maturity date of the respective coupon or upon the sale of the securities, if it occurs prior to the maturity date.

Other prepaid expenses include €157,376 thousand regarding retirement and survivors pensions. This value translates the impact of the transition to IAS 19, implementing the provisions of Notice of Banco de Portugal no. 4/2005. The amount of €157,376 thousand refl ects the net result of the following: (i) the entry, under prepaid expenses, of the total amount to be recognised in Results carried forward (€196,719 thousand), in an amortisation plan of fi ve fi xed annual instalments as a result of the annulment of actuarial deviations from previous years(€140,937 thousand) and of increased liabilities for retirement and survivors pensions, with reference to December 2004, stemming from the adoption of current regulations (€55,782 thousand) and (ii) the deduction of the 2005 annual amortisation (€39,344 thousand) – see Notes 12 and 32.

NOTE 12 | OTHER ASSETS – SUNDRY

31/12/2005 31/12/2004

Credit to the staff 130,897 127,413

Credit fallen due and other special credit 94,348 98,110

Fluctuation of values relating to pensions 39,160 104,091

Corporate Income Tax - Payments on account 13,800 20,124

Sundry debtors 9,879 10,954

Other reduced value accounts 133,215 129,328

290,401 362,607

Provisions for credit fallen due and other special situations (94,348) (98,110)

196,054 264,497

“Credit to the staff” corresponds mostly to loans to employees for house purchase.

“Credit fallen due and other special credit situations” refers mostly to receivables from Finangeste under the Banco de Portugal/Finangeste Arrangement of 9 January 1995, to the amount of €94,136 thousand (2004: €97,896 thousand).

As a result of the impact of the transition to IAS 19 and the adoption of Notice no. 4/2005, there was a sharp decrease in the item “Fluctuation of values relating to pensions”, originated by the annulment in 2005, with reference to 31 December 2004, of recognised amounts relating to actuarial deviations from previous years (see Notes 11 and 32). Therefore, the balance of €39,160 thousand in this item only refl ects actuarial deviations relating to 2005.

“Corporate Income Tax – Payments on account” refers to the provisions of Articles 97 and 98 of the Income Tax Code (CIRC).



NOTE 13 | BANKNOTES IN CIRCULATION

Euro banknotes in circulation on 31 December 2005 represent the proportion held by Banco de Portugal of total euro banknotes in circulation in the Eurosystem (see section 1.2 i) of Note 1).

NOTE 14 | LIABILITIES TO EURO AREA CREDIT INSTITUTIONS

Current accounts of credit institutions with Banco de Portugal serve a two-fold purpose: they are current/settlement accounts and accounts where funds are deposited for compliance with the minimum reserve system, which are remunerated at the marginal rate of the Eurosystem’s main refi nancing operations.

“Other liabilities to euro area credit institutions in euro” includes liabilities related to gold swap operations against euro.

NOTE 15 | LIABILITIES TO OTHER EURO AREA RESIDENTS DENOMINATED IN EURO

The sub-item “General government” records exclusively the balance on the current account of the Directorate-General of the Treasury.

“Other liabilities” includes the balances on current accounts of other fi nancial intermediaries and fi nancial auxiliaries with the Bank.

NOTE 16 | LIABILITIES TO NON-EURO AREA RESIDENTS DENOMINATED IN EURO

This item includes liabilities in euro arising from gold swap operations, of €412,613 thousand, which together with the liabilities to euro area residents arising from these operations (see Note 14) account for an overall value of €525,993 thousand.

The remaining balance on this item corresponds to the balances, denominated in euro, of the vostro accounts of international organisations (excluding the IMF) and several central banks.

NOTE 17 | LIABILITIES TO EURO AREA AND NON-EURO AREA RESIDENTS DENOMINATED IN FOREIGN CURRENCY

These items refl ect liabilities denominated in USD arising from gold swap operations against USD.



NOTE 18 | ACCRUALS AND INCOME COLLECTED IN ADVANCE

31/12/2005 31/12/2004

Income collected in advance 48 95

Accruals

Interest and other costs payable in connection with transactions denominated in foreign currency 7,339 5,249

Interest and other costs payable in connection with transactions denominated in euro 47,425 30,750

Payroll accrual 15,149 17,522

Supplies and services from third parties to be settled 760 535

70,672 54,056

70,672 54,151

Interest and costs payable in foreign currency refer essentially to accruals of the premiums calculated on swaps of gold against USD, which amounted to €7,185 thousand as at 31 December 2005 (2004: €4,974 thousand).

Interest and costs payable in connection with transactions denominated in euro refer to: (i) accruals of premiums calculated on swaps of gold against euro to the amount of €16,012 thousand (2004: €7,320 thousand), (ii) the remuneration of reserve requirements since 6 December 2005 to the amount of €5,794 thousand (2004: as from 8 December, €4,685 million) and (iii) the remuneration of the intra-ESCB balance relating to TARGET in December 2005 to the amount of €25,619 thousand (2004: €18,745 thousand).

NOTE 19 | OTHER LIABILITIES – SUNDRY

31/12/2005 31/12/2004

Banknotes withdrawn from circulation 222,911 230,614

Third parties 30,361 24,935

Estimate for income taxes 529 26,903

Other accounts of reduced individual value 1,119 708

254,920 283,160

“Banknotes withdrawn from circulation” represents the Bank’s liability to the holders of the banknotes as long as these can be exchanged.



NOTE 20 | PROVISIONS

Movements in “Provisions” during the fi scal year ended on 31 December 2005 can be summarised as follows:

Balance as at 31/12/2004

Movements Balance as at 31/12/2005Increase Decrease Total

PROVISIONS FOR RISKS

Provisions to be deducted from AssetsProvisions for credit fallen due and other special situations 98,110 – 3,762 (3,762) 94,348

Provisions for fi nancial holdings 29,147 – – – 29,147

127,257 – 3,762 (3,762) 123,495

Provisions recorded under liabilities

Provisions for gold fl uctuation risks 688,491 – 66,739 66,739 621,752

Provisions for exchange rate risks 895,125 – 121,062 121,062 774,063

Provisions for securities valuation risks 425,767 171,670 20,252 151,418 577,185

Provisions for interest rate risks 72,000 150,000 – 150,000 222,000

2,081,383 321,670 208,053 113,617 2,195,000

2,208,640 321,670 211,816 109,855 2,318,495

ADMINISTRATIVE PROVISIONS

Provisions recorded under liabilities

Provision for labour accidents 215 – 16(1) (16) 199

Provision for other risks and costs 150,434 – 150,434 (150,434) –

150,649 – 150,450 (150,450) 199

2,359,289 321,670 362,265 (40,595) 2,318,694

Total provisions to be deducted from assets 127,257 – 3,762 (3,762) 123,495

Total provisions recorded under liabilities 2,232,032 321,670 358,503 (36,833) 2,195,199

(1) Directly used provision with no refl ection on the profi t and loss account.

As regards movements in provisions in 2005 the Bank reduced: (i) part of the provision for gold fl uctuation risks, in order to maintain, following the reduction in quantities, a coverage rate per ounce of fi ne gold similar to that of 2004; (ii) by €121,062 thousand the provision for exchange rate risks, comprised of €15,395 thousand for the coverage of write-downs on foreign currency recognised in profi t and loss on 31 December 2005 and of €105,667 thousand for the provision to stand within the limit established in the PCBP; (iii) by €20,252 thousand the provision for securities valuation risks, for the coverage of write-downs recognised in profi t and loss at the end of 2005 and (iv) by €150,434 thousand the provision for risks of other risks and costs, of which €33,582 thousand relate to the coverage of ECB losses in 2004 and the remaining €116,852 thousand are due to the fading-out of risks justifying the setting-up of this provision.

Taking into account the prudential criteria set out in the PCBP and the Bank’s overall risk positions, in 2005 the Bank increased: (i) by €171,670 thousand the provision for securities valuation risks so as to cope with price devaluations and (ii) by €150,000 thousand the provision for interest rate risks.



NOTE 21 | REVALUATION DIFFERENCES

31/12/2005 31/12/2004

Gold revaluation differences 2,529,146 1,116,820

Foreign currency revaluation differences 46,947 7,114

Securities revaluation differences 1,351 13,337

Off-balance-sheet revaluation differences 13,230 24,742

Revaluation differences 2,590,673 1,162,013

Unrealised gains resulting from the valuation of the gold price in euro recorded a signifi cant increase, which fully absorbed the negative impact of the reduction in the physical stock in 2005 (see Note 2).

The increase in the foreign currency revaluation differences is mainly due to the depreciation of the euro against some of the currencies in the Bank’s portfolio, namely CAD and USD and against SDR.

The decline in securities’ revaluation differences is due to the decrease in the market value of the trading securities of the Bank’s portfolio.

The decrease in off-balance-sheet revaluation differences is mainly due to the maturing of a signifi cant part of the interest rate swap portfolio. The maturing of these operations originated the recognition of profi t to an amount of €7,800 thousand (see Note 24).

NOTE 22 | CAPITAL AND RESERVES

Balance as at

31/12/2004Increases

Payment of

dividendsTransfers

Balance as at

31/12/2005

Capital 1,000 – – – 1,000

Legal reserve 78,641 – – 7,003 85,644

Other reserves 569,860 161,036 (39,344) 28,013 719,565

Profi t/(Loss) for 2004 70,033 – (35,017) (35,017) –

Profi t/(Loss) for 2005 – 120,294 – – 120,294

719,535 281,330 (74,361) – 926,504

The net profi t for 2004 was placed on 11 May according to Decision no. 108/05/MEF of 27 April of the Minister of Finance and Public Administration by transferring to the Legal Reserve and to Other Reserves(7) and by paying to the State, as dividends, the amount of €35,017 thousand.

(7) In accordance with Article 5 of the Organic Law of Banco de Portugal, a reserve must be established each year, with no fi xed ceiling, formed out of 10% of the profi t for each fi scal year. The Board of Directors may establish other reserves and provisions, namely to meet depreciation risks or losses to which certain types of assets or operations are particularly exposed.



The increase in Other reserves refers to appropriations for the Reserve arising from gold transactions, refl ected in the profi t and loss account, in accordance with the provisions of Article 53 (1) of the Organic Law of Banco de Portugal, as amended by Decree-Law no. 50/2004 of 10 March, and with the Chart of Accounts of Banco de Portugal, approved by Decision no. 5850/2004 of 3 March of the Minister of State and Finance. The appropriations, amounting to €105,686 thousand and €55,349 thousand, were a result of the decisions of the Board of Directors of Banco de Portugal of 30 August and 20 December 2005 respectively (see Note 2).

The decrease in “Other reserves” originated from the annual amortisation of deferred costs resulting from the adoption in 2005 of Notice of Banco de Portugal no. 4/2005 on the accounting of liabilities for retirement and survivors pensions (see Note 11).

NOTE 23 | NET INTEREST INCOME

31/12/2005 31/12/2004

INTEREST INCOME

Gold 79 152Claims on non-euro area residents denominated in foreign currency 98,839 89,446 Securities 76,877 66,688 Deposits and other investments 13,501 15,388 International Monetary Fund 8,461 7,370Claims on euro area residents denominated in foreign currency 15,179 10,859 Deposits and other investments 15,179 10,859Claims on non-euro area residents denominated in euro 19,161 20,458 Deposits and other investments 19,098 5,184 Securities 62 15,275Claims on euro area residents denominated in euro 467,468 348,140 Securities 227,848 222,610 Lending to euro area MFIs 110,658 43,031 Intra-Eurosystem claims 126,205 78,946 Other 2,757 3,553Financial fi xed assets 497 –Off-balance sheet instruments 12,837 26,590

614,060 495,645INTEREST EXPENSES

Liabilities to non-euro area residents denominated in foreign currency 6,577 10,687 Liabilities denominated in USD concerning gold swaps 4,748 9,523 International Monetary Fund 1,657 1,163 Other 172 1Liabilities to euro area residents denominated in foreign currency 612 649 Liabilities denominated in USD concerning gold swaps 572 647 Other 40 2Liabilities to non-euro area residents denominated in euro 9,902 17,561 Liabilities denominated in EUR concerning gold swaps 9,864 17,561 Other 38 –Liabilities to MFIs denominated in euro 70,943 85,727 Current accounts 70,932 67,865 Certifi cates of deposit – 17,853 Other 11 9Intra-Eurosystem liabilities 277,049 190,060Other liabilities to euro area residents denominated in euro 2490 2,126 Liabilities denominated in EUR concerning gold swaps 2,490 2,126Off-balance sheet instruments 1,501 3,768

369,074 310,577

NET INTEREST INCOME 244,986 185,068



NOTE 24 | REALISED GAINS/LOSSES ARISING FROM FINANCIAL OPERATIONS

31/12/2005 31/12/2004

Spot foreign exchange transactions 15,398 (3,835)

Forward foreign exchange transactions 194,007 158,894

Securities transactions 12,893 16,200

Off-balance sheet instruments 7,827 39,212

230,126 210,471

In 2005 spot foreign exchange transactions recorded a positive net realised gain/loss, mainly stemming from the depreciation of the euro against the USD and SDR.

Profi ts in forward foreign exchange transactions in 2004 and 2005 include results from gold transactions (see Notes 2 and 22).

In 2005 realised gains/losses in off-balance-sheet instruments refer mostly to the advanced maturing of interest rate swaps.

NOTE 25 | WRITE-DOWNS ON FINANCIAL ASSETS AND POSITIONS

31/12/2005 31/12/2004

Write-downs on securities 20,252 5,840

Write-downs on off-balance sheet instruments 78 1,864

Write-downs on foreign currency 15,395 35,507

35,725 43,211

The increase in write-downs on securities is due to the decline in the market value of Banco de Portugal’s trading securities portfolio, given that there were no signifi cant changes in its composition.

The value recorded in write-downs on foreign currency is chiefl y due to the appreciation of the euro against some of the currencies that comprise the foreign currency investment portfolio, namely SEK and DKK.

NOTE 26 | INCOME FROM EQUITY SHARES AND PARTICIPATING INTERESTS

This item includes dividends received for the 2004 profi t and loss, regarding the participating interest of Banco de Portugal in the Bank for International Settlements (BIS) (€2,276 thousand).

It also refl ects €495 thousand received – following approval of the ECB’s annual accounts – relating to the redistribution of the excess amount retained due to ECB losses in 2004.

In 2005 the ECB’s income on euro banknotes in circulation amounting to €823 million was fully retained by the ECB in accordance with a decision of the Governing Council, with the purpose of establishing a provision for foreign exchange rate, interest rate and gold price risks.



NOTE 27 | NET RESULT OF POOLING OF MONETARY INCOME

As from 2003 the amount of each Eurosystem NCB’s monetary income is determined by measuring the actual annual income that derives from the earmarkable assets held against its liability base. The liability base consists of the following items: banknotes in circulation; liabilities to credit institutions related to monetary policy operations denominated in euro; net intra-Eurosystem liabilities resulting from TARGET transactions; net intra-Eurosystem liabilities related to the allocation of euro banknotes within the Eurosystem. Any interest paid on liabilities included within the liability base is to be deducted from the monetary income to be pooled. The earmarkable assets consist of the following items: lending to euro area credit institutions related to monetary policy operations denominated in euro; intra-Eurosystem claims equivalent to the transfer of foreign reserve assets to the ECB; net intra--Eurosystem claims resulting from TARGET transactions; net intra-Eurosystem claims related to the allocation of euro banknotes within the Eurosystem; a limited amount of each NCB’s gold holdings in proportion to each NCB’s capital key. Gold is considered to generate no income. Where the value of an NCB’s earmarkable assets exceeds or falls short of the value of its liability base, the difference shall be offset by applying to the value of the difference the average rate of return on the earmarkable assets of all Eurosystem’s NCBs taken together.

The monetary income pooled by the Eurosystem is allocated among NCBs according to the subscribed capital key. The difference between the monetary income pooled by Banco de Portugal, amounting to €236,472 thousand and reallocated to Banco de Portugal, amounting to €242,063 thousand is the net result arising from the calculation of monetary income (see Note 7).

NOTE 28 | OTHER INCOME

31/12/2005 31/12/2004

Other income

Tangible and intangible fi xed assets 55 341

Previous fi scal years income 2,951 1,718

Sundry income 2,654 6,777

5,660 8,836

Other expenses

Tangible and intangible fi xed assets 1 31

Previous fi scal years expenses 61 2,925

Sundry expenses 1,385 5,657

1,447 8,613

4,213 224

“Previous fi scal years income” includes €2,447 thousand relating to adjustments of earnings to be settled, as a result of changes to the accounting framework for the recognition of liabilities for retire-ment and survivors pensions.

“Sundry income” includes in particular: (i) €1,918 thousand relating to the supply of services to third parties (2004: €1,411 thousand and (ii) €362 thousand relating to receivables from Finangeste relating to claims recovered, under the contract for the assignment of debts (2004: €4,704 thousand).



“Sundry expenses” include: i) €1,264 thousand relating to the reimbursement to Finangeste of the costs incurred in the recovery of claims (2004: €488 thousand).

NOTE 29 | STAFF COSTS

31/12/2005 31/12/2004

Remuneration of the members of the Board of Directors and Board of Auditors 1,418 1,386

Employees’ salaries 67,665 67,122

Compulsory social charges 36,782 29,779

Voluntary social charges 7,799 7,634

Other staff costs 3,058 3,085

116,721 109,006

Compulsory social charges include expenditure on retirement and survivors pensions to the amount of €25,063 thousand (2004: €15,948 thousand), which, in addition to expenditure on Base Plans, include expenditure on wage supplements. The increase in this item is mainly due to the fact that values recognised in costs in 2005 already consider the change in the key assumptions for the calculation of liabilities for retirement and survivors pensions, in accordance with the provisions of Notice of Banco de Portugal no. 4/2005 governing the process of transition to the adoption of IAS 19 (see Note 32).

As at 31 December 2005 the Bank employed 1,702 staff (2004: 1,736). Among these, 49 are on secondment, on assignment and on unpaid leave, 14 are assigned to Valora and 34 to Sociedade Gestora do Fundo de Pensões (Banco de Portugal’s Pension Fund Management Company).

NOTE 30 | INCOME TAX

The Bank is subject to the Corporate Income Tax and to a Local Tax.

The Corporate Income Tax for 2005 was calculated on the basis of a nominal tax rate of 25 per cent. The value of the tax on profi ts, calculated according to the best estimates available, is €529 thousand and refl ects the accruals and deductions which are part of the taxable income, corporate municipal tax and autonomous taxation. As regards deductions, provisions that had been subject to taxes in previous years were reduced in 2005 (see Note 20).

Tax authorities have the possibility of reviewing the Bank’s situation with regard to taxes for a period of four years. Therefore, as a result of different interpretations of the tax legislation, there can be additional payments. However, the Board fi rmly believes that there will be no additional signifi cant payment regarding previous fi scal years.

NOTE 31 | OFF-BALANCE SHEET INSTRUMENTS

In addition to other off-balance-sheet instruments, the Bank, in the performance of its tasks, uses derivative fi nancial instruments chiefl y intended to manage risks associated with its assets, liabilities and off-balance-sheet instruments. These instruments normally have an underlying (i) market risk inherent in price or interest rate fl uctuations and a (ii) credit risk, generally corresponding to the advance settlement or replacement cost of the contracts at current market prices and rates.



On 31 December 2005 and 31 December 2004 the Bank had the following transactions outstanding:

31/12/2005 31/12/2004

Contractvalue (1)

Market value (2)

Effect on results (3)

Accruedinterest

(4)

Contractvalue (1)

Purchases Sales Net Net Net Purchases Sales

Foreign exchange and interest rate transactions

Forward transactions 10,000 10,000 92 – – 32,607 32,607

Interest rate swaps 514,870 514,870 10,775 13,230 1,727 776,894 776,894

Other forward transactions – – – – – 954,570 –

(1) Theoretical or notional value.

(2) The market value corresponds to the potential income or cost in which the Bank would incur in the event it had to settle these transactions, and considering the current market conditions and evaluation models currently used.

(3) The effect on results corresponds to the impact on the profi t and loss account in the event the Bank had to settle these transactions, and considering the current market conditions and evaluation models currently used.

(4) The value of accrued interest corresponds to interest receivable and payable accrued until the balance sheet date resulting from transactions outstanding.

NOTE 32 | RETIREMENT AND SURVIVORS PENSIONS

In accordance with the regulations in force and under the terms of the several pension plans with defi ned benefi ts, the Bank is responsible for the payment of retirement, disability and survivors pensions to its employees or their dependants, since most of them are not covered by the State Social Security System.

In accordance with the provisions of Notice of Banco de Portugal no. 4/2005 the transition to IAS 19 regulations took place in 2005, within the scope of post-employment benefi ts. In this context, the Pension Fund started to also fi nance the death grant envisaged in the collective wage agreement prevailing for the banking sector (ACT) and contributions to SAMS relating to pensions.

Thus, Banco de Portugal ensures through the Pension Fund the right to presumable disability, disability and early retirement pensions, as well as survivors pensions; it also ensures the right to supplementary benefi ts, to a death grant and the settlement of inherent charges in the payment of pensions, specifi cally those due as contributions to the health system.

Pensions result from the sum of the percentages calculated according to each component of pensionable earnings. Taking into account the differentiation of the benefi t, seven plans/regimes were set up, according to the Bank’s hiring date and the different remuneration components, characterised as follows:

Base Plans

Plan I: Defi ned benefi t non-contributory plan that covers employees hired up to 31 December 1994. The benefi ts offered by this plan are calculated according to the employee’s last basic salary.

Plan II: Defi ned benefi t contributory plan that covers employees hired as from 1 January 1995 who do not come from other credit institutions covered by the ACT, as far as social security matters are concerned (Clause 137-A of ACT). Employees participate in the plan’s funding with 5% of their pensionable salaries. The benefi ts offered by this plan are calculated according to the last basic salary and the years of service.



Plan III: Defi ned benefi t contributory plan that covers the members of the Board of Directors of Banco de Portugal. This plan started on 1 February 1998, when Law no. 5/98 of 31 January – Organic Law of Banco de Portugal – entered into force. Members participate in its funding with 5% of their pensionable salaries. The benefi ts offered by this plan are calculated according to the years of service.

Plan IV: Defi ned benefi t non-contributory plan that covers all employees who, although having been hired after 31 December 1994, come from other credit institutions covered by ACT as far as social security matters are concerned. The benefi ts offered by this plan are calculated according to the last basic salary and the years of service.

Pensionable Wage Supplement Regimes

Pensionable wage supplement regimes cover all the Bank’s employees who earn a wage supplement and who have chosen this severance plan.

Special regime A: Defi ned benefi t contributory plan that covers staff hired by Banco de Portugal up to 31 December 1998. The benefi ts offered by this regime are calculated according to the employee’s last wage supplement (employees can opt, at the moment of retirement, for the capital redemption of 1/3 of the pension to which they would have been entitled, while the remaining 2/3 are attributed as a pension).

Special regime B: Defi ned benefi t contributory plan that covers staff hired by Banco de Portugal between 1 January 1999 and 31 December 2000. The benefi ts offered by this regime are calculated according to the employee’s last wage supplement and the number of complete years of contribution (employees can opt, at the moment of retirement, for the capital redemption of 1/3 of the pension to which they would have been entitled, while the remaining 2/3 are attributed as a pension).

General regime: Defi ned benefi t contributory plan that covers staff hired by Banco de Portugal as from 1 January 2001. The benefi ts offered by this regime are calculated according to the employee’s last wage supplement and the number of complete years of contribution (without the possibility of capital redemptions).

The number of participants in the base plans and in the policy/pensionable wage supplement regimes promoted by Banco de Portugal is shown in the table below:

Number of participants

Plans Active staff Staff in retirement

and pensioners

Base Plans

Plan I 1,384 2,211

Plan II 305 2

Plan III 6 6

Plan IV 9 –

Pensionable wage supplement regimes

Special regime A 1,503 201

Special regime B 52 1

General regime 109 1

Insurance policy 29 –



Liabilities arising from pension plans funded through the Fund were calculated in an actuarial calculation prepared by Banco de Portugal’s Pension Fund Management Company, in accordance with the provisions laid down in Notice of Banco de Portugal no. 12/2001 of 9 November, supplemented by Notice of Banco de Portugal no. 4/2005 of 28 February, within the scope of the transition to IAS 19.

The main actuarial assumptions used in the actuarial calculations are the following:

Assumptions used

2005 2004

Discount rate 4.355% 4.161%

Expected return on the Fund’s assets 4.600% 5.150%

Expected wage growth rate

Plan III– 2.133% 1.731%

Other Plans and Regimes– 3.133% 2.231%

Pension discount rate 2.133% 1.731%

Tables used

mortality– TV 88/90 TV 73/77

disability– 1978 - S.O.A. Trans. Male (US)

turnover–

Plan III– —Other Plans and Regimes– T-1 Crocker Sarason (US)

Liabilities for retirement and survivors pensions relating to base plans and wage supplements regimes were recalculated in 2005, with effect from 31 December 2004, in order to determine the impact of the adoption of IAS 19, as laid down in Notice of Banco de Portugal no. 4/2005 of 28 February.

The recalculation of these liabilities took into consideration charges relating to contributions to SAMS of staff in retirement and pensioners and to the death grant. It also considered changes in the actuarial and fi nancial assumptions such as the change in the mortality table, the indexation of the wage and pension growth rate to the break-even infl ation derived from euro area Infl ation-Linked Bonds and the retirement age assumption.

In the wake of the transition to IAS 19, Notice no. 4/2005 sets forth that results carried forward shall recognise the impact, calculated with reference to 31 December 2004, caused by: (i) the resetting of actuarial deviations deferred from the balance sheet as at 31 December 2004, recorded under “Fluctuation of values” (“corridor”) and under deferred costs and (ii) the increase in liabilities for retirement and survivors pensions, stemming from the adoption of the current regulations (including the immediate recognition of deferred liabilities under the facility of Notice 6/95). This recognition in results carried forward, under the provisions of the aforementioned Notice, was deferred according to an amortisation plan of fi ve fi xed annual instalments, the fi rst having taken place in 2005.

With regard to the funding of liabilities for retirement and survivors pensions, with the purpose of maintaining funding levels similar to previous years, in 2005 Banco de Portugal made an extraordinary contribution to the Pension Fund, to a total amount of €94,904 thousand, of which €58,363 thousand referred to 31 December 2004 and €36,540 thousand referred to 2005.



31/12/2005 31/12/2004(recalculated)

31/12/2004

LIABILITIES

Pension liabilities 684,971 635,573 548,951

Base remuneration 652,901 610,938 527,467

Wage supplements 32,070 24,635 21,484

Past-service liabilities – active employees 522,458 450,867 491,958

Base remuneration 394,999 340,419 370,589

Wage supplements 127,459 110,448 121,369

Total liabilities 1,207,429 1,086,440 1,040,909

Non-recognised liabilities (Notice no. 6/95)

Value recognised in the fi scal year - - 1,281

Outstanding value regarding active staff on 31 December 1994 with presumable retirement after 31 December 1997 - - 10,251

VALUE OF THE FUND

Value at the beginning of the year 1,070,580 940,601 940,601

Contributions paid to the Fund 56,379 75,977 17,614

Current contributions 19,839 17,614 17,614

Extraordinary contributions 36,540 58,363 -

Pensions paid (45,075) (40,626) (40,626)

Net income of the Fund 99,642 94,628 94,628

Value at year-end 1,181,526 1,070,580 1,012,217

VALUE TO BE RECOGNISED IN RESULTS CARRIED FORWARD

Notice no. 4/2005 – Impact of transition to IAS 19 157,376 196,719 -

FUNDING LEVELS

Overall coverage rate 97.9% 98.5% 97.2%

Coverage rate - Notice no. 12/2001 - - 100.6%

Coverage rate - Notice no. 4/2005 115.4% 123.5% -

Costs recognised in profi t and loss for the year related to Base Plans and Pensionable Wage Supplement Regimes, to charges with SAMS for pensions and with the death grant amount to €25,063 thousand, as shown in the following table:

2005 2004

COSTS AND LOSSES RECOGNISED IN THE FISCAL YEARCurrent service cost 15,763 16,970Interest cost 55,018 47,378Expected return on the Fund’s assets (45,718) (48,400)

(see Note 29) 25,063 15,948

Depreciation for the year of the accumulated amount of prepaid expenses regarding actuarial deviations deferred from previous fi scal years - 5,000

Depreciation of liabilities with active staff on 31 December 1994 with presumable retirement after 31 December 1997

- 1,281

- 6,281

25,063 22,228



The signifi cant increase in staff costs relating to retirement and survivors pensions stems from both the inclusion of new charges with SAMS for pensions and the death grant and the aforementioned changes to assumptions.

According to the entry in the accounts referred to in section 1.2 m) of Note 1, the value recorded under the item “Fluctuation of values” as at 31 December 2005 shows an amount of €39,160 thousand, exclusively relating to deviations in 2005 (2004: €104,091 thousand).



9.4. External Auditors’ Report

PricewaterhouseCoopers& Associados – Sociedade deRevisores Ofi ciais de Contas, LdaPalácio SottomayorRua Sousa Martins, 1 – 3º1050 – 217 LisboaPortugalTelephone +351 2135 99 000Fax +351 2135 99 999

Auditors’ Report

Introduction

1 We have audited the fi nancial statements of Banco de Portugal, which comprise the balance sheet as at 31 December 2005 (with a total of €36,355,309 thousand and a total equity capital of €926,504 thousand, including a net profi t of €120,294 thousand), the related statement of income for the year then ended and the respective explanatory notes.

Responsibilities

2 It is the responsibility of the Board of Directors to prepare fi nancial statements that give a true and fair view of the Bank’s fi nancial position, its profi t and cash fl ows, as well as to adopt adequate accounting policies and criteria and to maintain an appropriate internal control system.

3 Our responsibility is to express an independent professional opinion based on our audit to those fi nancial statements.

Basis of audit opinion

4 We conducted our audit in accordance with the International Standards on Auditing issued by IFAC, which require that we plan and perform our audit to obtain reasonable as-surance that the fi nancial statements are free of material misstatement. For this, the audit included: (i) examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements and an assessment of estimates used in their preparation, which were based on judgements and criteria defi ned by the Board of Directors; (ii) assessing whether the accounting policies adopted and their disclosure are appropriate to the circumstances; (iii) assessing whether the consistency principle is applied; and (iv) evaluating the overall adequacy of the presentation of the fi nancial statements.

5 We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers & Associados – Sociedade de Revisores Ofi ciais de Contas, Lda.Sede: Palácio Sottomayor – Rua Sousa Martins, 1 – 3º, 1050 – 217 LisboaNIPC 506628752 Capital social €217 500

Matriculada na Conservatória do Registo Comercial sob o n.º 11912Inscrita na lista dos Revisores ofi ciais de Contas sob o n.º 183Inscrita na Comissão de Valores Mobiliários sob o n.º 9077



Opinion

6 In our opinion, the fi nancial statements give a true and fair view in all material respects of the fi nancial position of Banco de Portugal as at 31 December 2005 and of its profi t and cash fl ows for the year then ended, in accordance with the accounting principles and valuation criteria described in the Note 1.2 to the fi nancial statements..


PricewaterhouseCoopers & Associados – Sociedade de Revisores Ofi ciais de Contas, Lda.represented by:

José Manuel Henriques Bernardo – C.A.



9.5. Report and Opinion of the Board of Auditors

In accordance with the provisions laid down in Article 43 (1) (c) of the Organic Law of Banco de Portugal, the Board of Auditors submits its report and issues its Opinion on the report of the Board of Directors and the Financial Statements for the year ended on 31 December 2005, which were approved by the Board of Directors, at its meeting on 7 March 2006.

Report

1. The Board of Auditors, in use of the powers conferred on it, and similarly to past years, monitored with the required frequency the day-to-day operation of the Bank, through the participation, without voting rights, of its members in the ordinary weekly meetings of the Board of Directors and through the analysis of the documentation produced, namely by the Control and Accounting Department and by the Audit Department.

The analysis of the monthly accounting data also enabled the Board of Auditors to monitor the management and the evolution of the assets and fi nancial position of the Bank.

The checks of existing assets and valuables held by the various areas of the Bank continued to be made by the offi cials in charge and by the Audit Department, with a prior programming. The Board of Auditors monitored the end-of-year inspection of valuables carried out at the Bank’s head offi ce in Lisbon, at its Oporto branch and at the Carregado Complex.

The Board of Auditors appraised, at its regular monthly or extraordinary meetings, data reported to it, preparing working documents and issuing opinions or making recommendations, whenever necessary, as described in the respective minutes.

Opinions were also issued on the Bank’s Operating Budget for 2006.

In addition to the functions entrusted to it by the Organic Law of Banco de Portugal, the Board of Auditors, pursuant to the provisions of specifi c legislation, continued to monitor the operation and to issue its opinion on the report and annual accounts of the Mutual Agricultural Credit Guarantee Fund, the Deposit Guarantee Fund and the Mutual Counterguarantee Fund.

2. The Bank’s activity is explained in the Report of the Board of Directors, which also contains comprehensive information on the Financial Statements of the 2005 fi scal year.

The “Notes on the fi nancial statements” include detailed information on both the fi nancial statements and the main accounting policies and valuation criteria.

With regard to the accounts related to the main operating areas of the Bank, the PCBP covers the principles, criteria and techniques set out by the European Central Bank for the European System of Central Banks.

With respect to the analysis of the Balance Sheet and Profi t and Loss Account and comparing with data as at 31 December 2004, mention should be made, in summary, to the following changes:

Assets

increase of €1,057,327 thousand in “Gold and gold receivables”, mainly resulting from the combination of positive developments in the gold quotation in euro with the depreciation of the euro against the US dollar and the reduction in quantities;

increase of €2,519,436 thousand in “Lending to euro area credit institutions related to monetary policy operations”, essentially corresponding to the volume increase in longer-term refi nancing operations;

–

–



increase of €1,427,565 thousand in “Intra-Eurosystem claims”, essentially associated with “Net claims related to the allocation of euro banknotes within the Eurosystem”;

Liabilities

increase of €1,452,829 thousand in “Banknotes in circulation”, as a refl ection of the 13% increase in overall circulation at the Eurosystem level and of the adjustments envisaged in Decision ECB/2001/15;

decrease of €1,587,591 thousand in “Liabilities to euro area credit institutions related to monetary policy operations denominated in euro”;

increase of €4,228,461 thousand in “Intra-Eurosystem liabilities”, essentially associated with TARGET accounts (net);

increase of €1,428,660 thousand in “Revaluation differences”, resulting from the valuation of the gold quotation in euro.

Profi t and Loss Account

increase of €59,917 thousand in “Net interest income”, chiefl y accounted for by the rise in remunerated average balances in claims and liabilities and in the respective average interest rates;

decrease of €164,800 thousand in “Net result of fi nancial operations, write-downs and risk provisions”, mainly resulting from the increase in provisions for equity price fl uctuation risks and for interest rate risks, offset by reductions in provisions for gold fl uctuation risks and for exchange rate risks;

decrease of €150,434 thousand in the “Provision for other risks and costs”, stemming from the reduction in the coverage of ECB losses for 2004 (€33,582 thousand) and liabilities for retirement and survivors pensions, in accordance with Notice of Banco de Portugal no. 4/2005, within the scope of the transition to IAS 19 (€116,852 thousand);

increase of €30,301 thousand in “Net result of pooling of monetary income”.

The accounts of Banco de Portugal were affected by the conditions prevailing in international fi nancial markets and important management decisions regarding the composition of its assets portfolio:

In the fi nancial markets, the US dollar appreciated signifi cantly against the major currencies (namely the euro), while shorter-term market interest rates rose and longer-term rates increased less or even decreased (similarly to the euro). Developments in gold quotations were positive in US dollars and given the recovery of this currency against the euro, the increase in the gold quotation in euro was even more signifi cant;

These price developments in fi nancial markets determined increases in unrealised capital gains in gold operations and in most of the foreign currency portfolio, and the remaining share was affected by write-downs (according to the Eurosystem’s accounting rules, write-downs are recognised as losses for the year);

With regard to internal management decisions and taking into account the exchange rate risk, special mention should be made to the reduction of the interest rate risk exposure, through the signifi cant increase in the euro portfolio, with the continued prudent management of exposure to the various foreign currencies. Reference should also be made to the sale of 45 tons of gold under the Central Bank Gold Agreement of 26 September 1999, which was renewed in 2004;

–

–

–

–

–

–

–

–

–

–

–

–



In accordance with the provisions of Article 53 (1) (b) of the Organic Law of Banco de Portugal capital gains in gold sale operations are allocated to the building up of a special reserve related to gains in these operations. As a consequence, capital gains in 2005 (€161,035 thousand) were entirely credited to reserves.

3. In 2005 Banco de Portugal recorded a profi t of €120,294 thousand, i.e. an increase of €50.261 thousand compared with that recorded in the 2004 fi scal year. The profi t and loss account shows the contribution of each item to “Net profi t/loss for the year”.

As regards the distribution of 2005 results, according to the provisions laid down in Article 53 (2) of the Organic Law of Banco de Portugal, the Board of Directors proposes the following distribution of profi t:

under the terms of sub-paragraph a): 10% to the legal reserve (€12,029,442.91);

under the terms of sub-paragraph b): 10% to other reserves (€12,029,442.91);

under the terms of sub-paragraph c): 30% to other reserves (€36,088,328.73) and 50% to the State, as dividends (€60,147,214.55).

4. The external auditors issued no reserves in their report.

Opinion

In view of the data shown and on the basis of analyses carried out and information obtained, the Board of Auditors raises no objection to the approval of the 2005 Balance Sheet and Accounts nor to the proposal for the distribution of profi t.

The Board of Auditors wishes to express to the Governor, the Board of Directors and the staff of the Bank its appreciation for their co-operation.


THE BOARD OF AUDITORS

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Documents

Annual Report - 2005 · Vítor Manuel da Silva Rodrigues Pessoa José António da Silveira Godinho (1) Appointed by Resolution of the Council of Ministers no. 51/2006 ... Emílio