Portugal still faces some tough challenges but is on track to meet this year’s budget deficit goal despite a shortfall in performance so far, officials from the European Union and IMF said on Friday. The officials, who carried out the first review of Portugal’s economy under a 78-billion-euro international bailout, said that they would recommend the disbursement of the second tranche of the rescue funds. “There is no doubt that while we are off to a strong start the most difficult challenges are still ahead,” said Poul Thomsen, the IMF mission chief to Portugal.He warned that if there was any serious weakening of the economic environment in core European states there would be a “significant negative impact.”
Portugal’s economy is expected to contract by 2.2 per cent this year and only return to growth in 2013 as the government enacts tough spending cuts and across-the-board tax hikes. Europe’s debt crisis has turned on Spain and Italy in recent weeks, heightening risks for the euro zone. But the officials said it was premature to talk about fresh rescue funds for Portugal, like Greece is set to receive. “I am confident that Portugal will return to the market at the end of the program, so it’s too soon now to talk about new money,” Thomsen said. Portugal is to return to the primary bond market in the second half of 2013 under the terms of the deal. Portuguese 10-year bond yields were unchanged after the announcement at around 11.7 per cent. But the PSI20 stock index in Lisbon was about 2 per cent higher, also benefiting from overall firmer European markets.