Report No. 1462a-PO Appraisal of Banco de Fomento Nacional ... · CURRENCY EQUIVALENTS Until 1971 1...

Report No. 1462a-PO FILE CQPYAppraisal of Banco de Fomento Nacional PortugalMay 9, 1977

Industrial Development and Finance DivisionProjects DepartmentEurope, Middle East, and North AfricaRegional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Until 1971 1 US dollar = 28.75 escudos1 escudo = 0.035 US dollar

1972 (yearly average) 1 US dollar = 27.25 escudos-1- escudo = 0.037 US dollar

1973 (yearly average) 1 US dollar = 24.67 escudos1 escudo = 0.041 US dollar




1977 (February 25) 1 US dollar = 32.92 escudos1 escudo = 0.030 US dollar

1977 (February 26) 1 US dollar = 38.73 escudo1 escudo = 0.026 US dollar

(In the report the exchange rate used for conversions is the1976 average)

GLOSSARY OF ABBREVIATIONS

BFN Banco de Fomento NacionalCGD Caixa Geral de DepositosDFC development finance companyEEC European Economic CommunityEFTA European Free Trade AssociationEIB European Investment BankGFCF gross fixed capital formationIAPMEI Instituto de Apoio as Pequenas e Medias

Empresas Industriais (Institute for theSupport of Small and Medium IndustrialEnterprises)

IERR internal economic rate of returnIFRR internal financial rate of returnPISEE Programa de Investimentos do Sector

Empresarial do Estado (InvestmentProgram for Public Sector Enterprises)

PMEs pequenas e medias empresas (small andmedium enterprises)

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

APPRAISAL OF

BANCO DE FOMENTO NACIONAL

PORTUGAL

Table of Contents

Page No.

BASIC DATA

SUMMARY .. ...................... * * .. * I ............ i-ii

I. INTRODUCTION .......................................... . 1

II. THE ENVIRONMENT ......... . .... ......... . 1

III. BFN'S STRUCTURE * ................. ..... ............ 6

A. Legal Basis and Ownership .............. * ...... 6

B. Boards and Committees ........ ................... 7

C. Management and Staff ..... .................. . . . . . . 7

D. Branches ................................................... 8

E. Objectives and Policies ....................... 8

F. Procedures ............................................ 0...... 9

IV. BFN'S OPERATIONS ......... . . .. ................................... . 12

A. Characteristics ........ . . . . . ....................... ..... . . . 12

B. Economic Impact ........ . . . . ................................ . 13

V. BFN'S FINANCIAL SITUATION .................. ........ 14

A. Resource Position ... ......................... 14

B. Quality of Portfolio ....................... a 15

C. Financial Performance and Position ............ 16D. Audit ..................................................... 18

VI. PROSPECTS ...................... .................... 18

A. The Environment ............ ................... 18

B. Projected Operations ......................... 20

C. Resource Requirements ............ ............ . 21

D. Financial Prospects ........... ................ 22

This report was prepared by Messrs. Henry B. Thomas and Bernard Snoy

on the basis of their missions to Portugal in September/October and

December 1976.

This document hs a rtricted distribution and may be used by rcipients only in the performaceof ter ofcial duties. Iu cotents n ay not otherwise be disclosed without Wnd bank authoriation.

Table of Contents (Continued) Page No.

VII. THE LOAN - ITS OBJECTIVES, JUSTIFICATIONAND FEATURES ................................... 22

VIII. AGREEMENTS REACHED AND RECOMMENDATION .............. 24

ANNEXES

1. The Environment for BFN's Operations

Appendix A Incentives for ExportsAppendix B Forms of Assistance Extended by the Institute for the

Support of Small and Medium Industrial EnterprisesAppendix C Portugal's Financial Institutions

2. Maximum Interest Rates3. Structure of Lending Rates4. Expected Real Cost of Subloans5. Board of Management and Commission of Control6. Responsibilities of Board of Management7. Organization Chart8. Summary of Operations 1971-769. Analysis of Approved Loans 1971-7610. Equity Portfolio as of December 31, 197511. Distribution of Approved Loans by Size of Project12. Sources of Funds 1971-7613. A. Resource Position as of December 31, 1976

B. Notes to Resources14. Geographical and Sectoral Breakdown of Portfolio

as of December 31, 197515. A. Arrears on Loan Portfolio as of June 30, 1976

B. Evolution of Arrears on Loan Portfolio16. Income Statements 1971-7617. Balance Sheets 1971-7618. Debt-Equity Ratio Calculation 1971-7619. Indicators 1971-7620. Major Assumptions Underlying the Projections21. Projected Operations22. Projected Income Statements 1977-8123. Projected Balance Sheets 1977-8124. Projected Cash Flow Statements 1977-8125. Projected Indicators 1977-8126. Strategy Statement27. Estimated Schedule of Disbursements

BASIC DATA

ON


Year of establishment: 1959

Ownership (as of December 31, 1976) Escudos Percent

Portuguese Government 2.5 billion 100 %

Resource position (as of December 31, 1976) Escudos(millions)

Equity 3,521.9Time deposits 10,976.2Bonds 426.5Government loans 2,560.7Local currency loans 11,699.3Foreign currency loans 2,916.3

Total resources 32,100.9

Outstanding loans 29,489.4Security portfolio 1,506.4

Total portfolio 30,995.8

Resources available for disbursement 1,105.1

Approvals of loans and investments(Portugal only) 1974 1975 1976

(million escudos)

Loans 10,072 10,761 18,800Equity investments 78 15 368Bonds _ _

Totals 10,150 10,776 19,168

Loanis and investents disbursed 6,028 7,111 8,318

Earnings record (percentage)

Profit before tax and provisionsto average total assets 1.3 1.6 3.2

Profit before tax and provisionsto average equity 11.7 17.1 34.2

Met profit to year-end sharecapital 0.5 6.0 4.1

Dividends paid to year-endslhare capital - - -

Financial position (as of December 31, 1976)

Total debt/equity ratio 9.2Long-term debt/equity ratio 8.4Debt/equity ratio (proposed forIBRD agreement) 6.9

Reserves and provisions toloan and equity portfolio(%) 9.3

Interest rates and charges (as of March 1977)

Interest rates on loans: 1/1-2 years 12.75%2-5 years 13.75%5-7 years 14.25%over 7 years 14.75%

Commitment charge 1.0%

l/ Lower rates are used for loans for certain specified activitiesconsidered by the Government to be of special importance.

APPRAISAL OF


PORTUGAL

SUMMARY

i. Banco de Fomento Nacional (BFN) was created in 1959 to act asPortugal's development bank. It, as well as all other locally owned finan-cial institutions, was nationalized in March 1975. It makes medium- andlong-term loans, mainly to industry, transport and public utilities. In-dustry, particularly manufacturing industry, is the field in which it hasacquired a comparative advantage through its project appraisal capabilityand where its contribution to medium- and long-term financing exceeds thoseof all other Portuguese financial institutions. The proposed Bank loan of$50 million would be the first Bank Group lending to BFN.

ii. The economic performance of Portugal has been substantially affectedby the political developments following the revolution of April 25, 1974, thedecolonization of the former overseas territories, the recession in the econ-omies of the OECD countries and the increases in the prices of imports. Themost serious problems facing the economy now are the unprecedented level ofunemployment and the large deficit in the balance of payments. To cope withthis situation and to initiate the long-term adjustments necessary to resumegrowth in the economy, the Government has taken appropriate measures aimed atcontaining private and public consumption as well as imports while restoringa more favorable climate to encourage investments and exports.

iii. Manufacturing industry was the leading sector in the Portugueseeconomy during the 1960's and early 1970's, but its structure proved partic-ularly vulnerable to the profound changes in the domestic and internationalenvironment that occurred in 1974 and 1975. Through the nationalizations ofMarch 1975, the Government acquired direct or indirect control of the mostimportant firms in heavy industry and a few other sectors. Private firmscontinue, however, to dominate aggregate industrial output and exports andto employ the bulk of the industrial labor force, particularly the small andmedium sized ones. Following a substantial decline in 1974 and 1975, privateindustrial investment is now slowly recovering, encouraged by improved laborrelations and a number of Government measures.

iv. The main external sources of term financing for industrial invest-ment are BFN and Caixa Geral de Depositos (CGD, Portugal's largest savingsbank). As of the end of 1975 BFN held approximately 39% of medium- andlong-term loans to industry (about 49% in the case of manufacturing only).The interest rate structure, which was traditionally low before the revolu-tion, has been raised five times since April 1974. Although inflation hasbeen high over the last three years, these interest rate increases combinedwith the Government's determination to fight inflation make it likely thatpositive real interest rates will apply to future projects financed by BFN.

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An Exchange Risk Guarantee Fund has been established by the Government, asa temporary measure, to assume part of the exchange risk on foreign loans.

v. BFN itself is a widely respected institution with experienced andcapable management and staff, and generally sound procedures. Although itsappraisal work is done to fairly high standards, its appraisal methodologycould be substantially strengthened. BFN's management is particularly eagerto benefit from the Bank's assistance in this area and the provision of thisassistance is one of the objectives of the proposed loan.

vi. BFN's operations increased at a fast rate in the last years beforethe revolution. Despite the fall in investment activity since then, BFN'soperations have continued to increase reflecting, among other things, ashift by medium and small firms from short-term commercial bank financingto BFN. The economic impact of these operations has been appreciable. How-ever, the difficulties facing Portugal's economy are reflected in the steadyincrease of arrears which at the end of June 1976 affected about one-thirdof the loan portfolio. BFN is taking appropriate action under the circum-stances to deal with this problem.

vii. The objectives of the proposed loan would be (a) on country grounds,to provide a transfer of resources to ease the foreign exchange constraintfaced by the country; (b) to contribute to the recovery of industrial sectorinvestment with particular emphasis on industrial projects with a high employ-ment and export potential; and (c) to provide institution building assistancefor the improvement of appraisal and other procedures so as to enhance BFN'simpact on the industrial sector. The proposed loan may also serve as acatalyst for other foreign lending to BFN.

viii. The proposed loan of $50 million would provide only about 22% ofBFN's forecast commitments for foreign currency loans during the two-yearperiod July 1977 to June 1979. The proposed loan, however, would be limitedto direct credit (i.e. excluding credit to finance production and sales madeon credit to other Portuguese or foreign firms) for industrial projects.The proposed loan would provide about 53% of the forecast commitments forthese projects during the two-year period.

ix. Agreement having been reached on the principal issues, the projectis suitable for a Bank loan of $50 million, to be utilized as outlined above.

APPRAISAL OF


PORTUGAL

I. INTRODUCTION

1.01 Banco de Fomento Nacional (BFN) was created in 1959 to act asPortugal's development bank. It makes medium- and long-term loans, mainlyto industry, transport and public utilities. Industry, particularly manu-facturing industry, is the field in which it has acquired a comparativeadvantage through its project appraisal capability and where its contributionto medium- and long-term financing exceeds those of all other Portuguesefinancial institutions.

1.02 An identification mission visited Portugal in January 1975 and con-cluded that BFN was the most suitable borrower for a DFC-type line of credit.However, Portugal's political and economic conditions delayed the preparationof the project until the spring of 1976. The following report is based onappraisal missions to Portugal in September/October and December 1976 andrecommends a loan to BFN in the amount of $50 million. The proposed loanshould meet about 22% of BFN's total forecast foreign exchange resource re-quirements over the two-year period from the middle of 1977 to the middle of1979.

II. THE ENVIRONMENT 1/

2.01 The Economic Environment. The latest economic report on Portugal,entitled "Portugal: An Economy in Transition" (Report No. 1408a-PO) wasdistributed to the Executive Directors on March 16, 1977. It gives a com-prehensive picture of the problems confronting the Portuguese economy both atthe macro-economic and the sectoral levels and puts them in the necessaryhistorical perspective. In the five-year period preceding the revolution ofApril 25, 1974, Portugal's real GDP grew at an average annual rate of 7%.This growth was sustained by a relatively high rate of gross fixed capitalformation (GFCF), averaging some 21% of GDP, and was accompanied by a strongexport performance with exports increasing at a rate of 9% p.a. in real terms.In 1973 GDP at market prices was $11.4 billion equivalent, total GFCF, $2.3billion equivalent, and exports, $1.7 billion equivalent. 2/ This economicperformance, however, was substantially affected by the political developmentsfollowing the revolution, the decolonization of the former overseas territories,the recession in the economies of the OECD countries and the increases in theprices of imports. The rate of growth of GDP decreased to 4% in 1974 and

1/ This chapter is a summary of a more detailed assessment of the environ-ment for BFN's operations given in Annex 1.

2/ Dollar equivalent figures for 1973 are computed at the 1973 averageexchange rate of US$1.00 = Esc 24.67.

became negative by 3% in 1975. GFCF declined by 3% in 1974 and 39% in 1975while exports declined in real terms by 11% in 1974 and 15% in 1975. Prelim-inary estimates for 1976 suggest small increases in GDP, GFCF and exports.

2.02 Beside a high rate of inflation, estimated at 22% for 1976, themost serious problems facing the economy now are the unprecedented level ofunemployment, which affected 14% of the labor force at the end of 1976, andthe large deficit in the balance of payments, which slightly exceeded $1.0billion equivalent on the current account for 1976. To cope with the deter-ioration of the economic situation since the revolution and to initiate thelong-term adjustments necessary to resume growth in the economy, the Governmentin early 1976 introduced austerity measures aimed at containing private andpublic consumption as well as imports while a more favorable climate wasrestored to encourage investment and exports. These measures were confirmedand expanded in the program of the first constitutional Government (theGovernment's Program) which was approved by the Assembly of the Republic inAugust 1976. A one-year Plan for 1977, approved by the Assembly in December1976, outlined more detailed macro-economic targets and policy measuresdesigned to revive the economy. At the end of February 1977 the Governmentofficially devalued the escudo by 15% 1/ as part of a comprehensive economicpolicy package expected to improve the balance of payments situation and tostimulate the recovery of the economy.

2.03 The Industrial Environment. Manufacturing industry was the leadingsector in the Portuguese economy during the 1960's and early 1970's. Value-added grew at an average rate of about 10% p.a. from 1968 to 1973 when itreached $3.6 billion equivalent or 35% of GDP at factor cost. In the sameyear, manufacturing industry employed 868,400 people or 28% of the labor forceand accounted for exports of $1.3 billion equivalent, over 70% of the total.GFCF was about $650 million equivalent or 28% of the total. This remarkableperformance took place, however, within a seriously unbalanced industrialstructure. Growth was concentrated in a relatively small number of large andmodern enterprises enjoying privileged access to credit and foreign technology,while the vast majority of medium and small enterprises, accounting for thebulk of industrial employment, were given little assistance and few incentivesto modernize and reach adequate dimensions. All this occurred in a context ofartificially low wages, low interest rates, cheap raw materials and energy,protective tariffs and privileged conditions for Portuguese exports in theformer overseas territories.

2.04 This unbalanced industrial structure proved particularly vulnerableto the profound changes in the domestic and international environment thatoccurred in 1974 and 1975. While the performance of many large firms wasaffected by sluggish markets, disruptions in labor relations, state interven-tion or outright nationalization, most of the small and medium enterpriseswere plunged into a serious liquidity crisis by the sharp increases in nominal

1/ The new rate is US$1.00 = Esc 38.73 compared to US$1.00 = Esc 32.92 onthe eve of the February 26, 1977 devaluation.

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wages and in the cost of raw materials and energy. As a result, manufacturingoutput increased by only 2% in 1974 and fell by 5% in 1975; manufacturing ex-ports decreased by 10% in 1974 and 13% in 1975. The drop in profits combinedwith political uncertainties caused domestic and foreign private investment tocome almost to a standstill.

2.05 Through the nationalizations of March 1975 the Government acquireddirect or indirect control of the most important firms in heavy industry anda few other sectors. Following a period of improvisation, suitable steps arebeing taken to reorganize this expanded public sector, on which the Governmentcounts to spearhead the recovery of the whole economy. Private firms continue,however, to dominate industrial output and to employ the bulk of the indus-trial labor force, particularly the small and medium sized ones. Also themajor exporting industries such as food processing, textiles, clothing andfootwear, wood and cork products, and electrical and non-electrical machineryremain in private hands. Following a difficult period for private entrepre-neurs, investment is returning slowly to its pre-revolution level. Time isneeded to restore confidence, reverse deteriorated financial situations,reestablish labor relations on a new basis, adjust to the new factor pricesand create new conditions of profitable operation for the domestic and exportmarkets.

2.06 Through numerous policy measures adopted since November 1975, theGovernment has made a major effort to alleviate the fears of private entre-preneurs and restore a favorable investment climate. The Government's Programexplicitly recognizes the positive role to be played by the private sectorin the country's economic development. A proposed law would exclude privateenterprise activity only from public utilities, heavy industry, armaments andbanking. Furthermore, the Government's Program clearly states that no furthernationalization are envisaged and guidelines have been established for thecompensation of the previous owners of nationalized enterprises. At the sametime the resumption of foreign direct investment is encouraged by the ForeignInvestment Code published in April 1976. Also a new Government agency hashelped small and medium enterprises (pequenas e medias empresas or PMEs)survive their liquidity crisis and is now assisting their restructuring andadjustment to the new economic environment. In the field of labor relations,the Government in October 1976 submitted to the Assembly a package of measureswhich has already had a favorable impact on labor discipline and absenteism.

2.07 The pervasive price controls introduced after the revolution werepartially liberalized in 1976 except for basic foodstuffs. Export incentiveswere reorganized and new concessions were obtained for Portuguese exportsin the EEC and in EFTA. Furthermore, the 15% devaluation of the escudo inFebruary 1977 (combined with the 24% de facto devaluation that took placebetween April 1974 and February 1977) is expected to compensate to a greatextent for the decline in the competitive position of Portuguese industriesresulting from the faster labor cost increases in Portugal than in Portugal'smajor trading partners.

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2.08 The recovery of Portugal's industrial sector will largely depend onthe efficiency with which the limited available resources are utilized. Theeasy credit policies of the past, combined with investment incentives encour-aging capital-intensive investments, often led to sub-optimal investment deci-sions. As a result, there are a number of ongoing investments which do notaddress effectively the two crucial problems now facing the economy, namelyunemployment and the balance of payments deficit. As a step towards correct-ing this legacy, improvements are planned in project preparation and appraisalmethodologies particularly for the public sector. The improvements wouldfocus on the calculation of the economic rate of return and other such tests.Preparatory work is already underway, supported by the Bank, to train staffmembers in the Ministries of Planning and Industry and in BFN and to developthe data needed for such analysis. Furthermore, at the request of the Govern-ment, a Bank industrial sector mission is visiting Portugal this month toreview the potential for export promotion and employment creation in theindustrial sector. The mission is expected to make recommendations concerningPortugal's industrial sector policies and incentive systems. The preliminaryfindings and recommendations of this mission will be made available to theGovernment in the field in late May and in the form of a report about fivemonths thereafter, in order to be of use in the preparation of the Medium-TermPlan (1978-80), scheduled for consideration by the Assembly later in 1977.Confirmation was obtained during negotiations that, in the course of thereview of that mission's findings, the Government will discuss with the Bankthe changes it proposes to introduce in its industrial policies and the time-table it intends to follow in implementing these changes.

2.09 The Financial Environment. Since the revolution Portugal's finan-cial sector has undergone profound changes affecting the size and the patternof flows of funds. In the face of declining domestic savings considerablepressure has been put on financial intermediaries to meet the financing needsof the public and private sectors. Following a period of expansionary creditpolicies, it is now recognized that further credit expansion must be moreselective, channeling resources towards economically viable enterprises cap-able of alleviating the unemployment and balance of payments problems. Theinstitutional structure of the financial sector was also affected by thenationalization in March 1975 of all commercial banks and insurance companieswith the exception of those owned by foreign interests, which brought mostfinancial institutions under Government control.

2.10 The main institutional sources of term financing for industrial in-vestment are BFN and Caixa Geral de Depositos (CGD), Portugal's largest savingsbank. As of the end of 1975 BFN held approximately $580 million equivalentof medium- and long-term loans to industry or 39% of total term financingfor that sector ($460 million equivalent or 49% of the total in the case ofmanufacturing only). BFN is also the lending institution best equipped toappraise industrial projects. It is therefore the most appropriate financialinstitution through which to channel assistance to the industrial sector.BFN has also a substantial role in mobilizing domestic resources, essentiallyin the form of time deposits. In this area CGD enjoys a dominant positionand could make available part of its excess resources to BFN.

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2.11 Interest Rates and Inflation. Maximum interest rates for both timedeposits and loans are established by the Central Bank. The interest ratestructure, which was traditionally low before the revolution, has been raisedfive times since April 1974 (see Annex 2), the last increase taking place inFebruary 1977 at the same time as the 15% devaluation of the escudo. Depend-ing on the term, the present rates on time deposits range from 5% to 13% andon loans from 10.25% to 14.75%, while the Central Bank discount rate is 8%.There is also an elaborate system of preferential lending rates (see Annex 3)for exports and priority sectors which reduces somewhat the interest rateduring the first four years on certain qualifying loans. Although inflationhas been high over the last three years (25% in 1974, 15% in 1975 and 22% in1976), producing negative real interest rates in many instances, projectionsunder alternative assumptions over the life of a typical six-year loan suggestthat the real interest rates applying to future investment projects financedby BFN will be positive or only very slightly negative (see Annex 4). Fur-thermore, should the Central Bank again adjust interest rates upwards, suchadjustments could be immediately passed on by BFN to existing borrowers underthe terms of ongoing loans. The Central Bank has not raised interest rates toa higher level, in spite of past and potential inflation rate levels, becauseof the fear of further discouraging investors already in a mood of high riskaversion. Increases in time deposits in 1976 seem to support the CentralBank's view that the current rates on time deposits are sufficient to inducean increasing inflow of savings to the banking system. The Government, how-ever, wants as quickly as possible to restore positive real interest ratesfor time deposits and loans to enable interest rates to play fully their rolein the mobilization of savings, the allocation of credit and the selection ofappropriate technologies. In view of the Government's determination to reduceinflation and demonstrated willingness to increase interest rates, the presentsituation can be accepted for the proposed Bank loan.

2.12 Foreign Exchange Risk. The Central Bank must authorize all foreignborrowings, which it does with a minimum of formalities. With a few excep-tions, all foreign exchange transactions must also be channelled through theCentral Bank. Recent regulations require investors to finance with foreignborrowings 80% of the cost of foreign equipment purchases exceeding $100,000equivalent (for purchases below $100,000 the proportion is 60%). Until aboutSeptember 1976 the general policy of the Central Bank had been to assume,usually at no fee, the exchange risk on foreign borrowings. 1/ Subsequentlythe Central Bank attempted to encourage the borrowers to assume the risk. Inthe case of foreign lines of credit channelled through financial intermedia-ries, the sub-borrowers were encouraged to assume the risk by being chargedinterest rates a few points below the maximum rates for local currency loans.

1/ The Government, rather than the Central Bank, assumes the foreign ex-change risk on the EIB loan to BFN and on the EFTA Industrial Develop-ment Fund (see Annex 13). In both cases the proceeds will be on-lentat the same rates as domestic currency loans.

2.13 In February 1977, along with the Government's announcement of the15% devaluation of the escudo and the increase in interest rates of 1.5 per-centage points, an Exchange Risk Guarantee Fund designed to partially coverthe foreign exchange risk on loans was established. This coverage will onlybe granted for investments of "great national interest" and normally on ayearly basis, with exchange rates determined at the beginning of each year ofcoverage. Renewal of the coverage will be at the Fund's option. The Fundwill cover the ultimate borrowers of foreign exchange for exchange ratefluctuations exceeding 3% for the duration of the coverage. The Fund will befinanced through an exchange guarantee fee, 1/ gains resulting from foreigncurrency devaluations exceeding 3%, an interest rate surcharge on lesserpriority loans (for example consumer loans), a levy on foreign transactionsand Governmment resources if needed. Since the escudo is now at a moreappropriate parity, and interest rates have been increased, the operationof the Fund should not involve, in the current circumstances, an importantsubsidy element towards the cost of imported capital goods. The Fund shouldrather be seen as providing encouragement to the revival of investment, sincemany entrepreneurs may still be apprehensive about further devaluations of theescudo and thus defer their investments. While for the time being the Fund isan acceptable solution to the foreign exchange risk problem, the Governmenthas confirmed that the eventual assumption of the entire foreign exchange riskby the ultimate borrowers is its objective. The Government has also confirmedthat the Fund will operate to the greatest extent possible on the basis ofself-sufficiency and that the advisability of continuing its operations willbe reviewed as part of the continuing dialogue between the Government and theBank on the economy of Portugal, including the discussions of the findings andrecommendations of the Bank's recent industrial sector mission.

III. BFN'S STRUCTURE

A. Legal Basis and Ownership

3.01 BFN was created as a joint stock company with unlimited durationby a decree law issued in November 1958 and began operations late in 1959.BFN's Statutes stem from the decree law but will be modified shortly totake into account a new law on the management of nationalized credit in-stitutions and the decolonization of the former overseas territories whereBFN had been operating.

3.02 BFN has a paid-up share capital of Esc 2.5 billion ($83 millionequivalent), increased recently from Esc 1.5 billion. Before the revolu-tion the Portuguese Government was by far BFN's largest shareholder, directly

I The exchange guarantee fee paid to the Fund will be equal to the differ-ence between the maximum rate for similar term escudo loans and the rateat which the foreign funds have been obtained minus a small percentage,expected to be about 1.25%. The ultimate borrower will pay an interestrate equal to the rate payable on the foreign funds plus the fee referredto above plus a spread of perhaps 2% to the intermediary; this rate willtherefore be some 0.75% higher than for similar escudo loans.

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holding 55.5% of the total. BFN was fully nationalized in March 1975 at thesame time as most other credit institutions. A procedure has already beeninitiated to compensate the private shareholders.

B. Boards and Committees

3.03 Board of Management. BFN's Board of Management is composed offive members (listed in Annex 5) appointed for renewable three-year termsby the Government. The Board is to meet in regular session at least oncea week and in special session whenever convened by the President. It hasall the necessary powers to manage BFN. Although responsibility for thevarious departments within the institution is divided among the members ofthe Board (see Annex 6), they remain jointly responsible for overall manage-ment policy.

3.04 Commission of Control. BFN's Commission of Control is composed ofthree members (listed in Annex 5) appointed for a three-year term, renewableonly once. While the Commission's functions are broadly defined to includechecks of BFN's compliance with relevant laws and regulations, examinationof periodic reports submitted by the Board, and issuance of opinions rela-tive to financial statements, it is doubtful that it will have the capabilityto play more than a limited role as it lacks the relevant experience. TheCommission may, however, be assisted by an independent outside audit firm andBFN has engaged Price, Waterhouse and Co. to audit the financial statements.

3.05 Supervision by the Minister of Finance. To enable the Minister ofFinance to exercise broad supervision of its operations, BFN must submit tohim for approval the annual operating budget and financial statements. Pend-ing adoption of a special law on the distribution of the net earnings ofnationalized credit institutions, the Minister approves the distribution ofBFN's earnings.

C. Management and Staff

3.06 Dr. Salgueiro has been President of the Board of Management and thechief executive of BFN since February 1976, following a distinguished careerin BFN and the Government. An economist by background with extensive expe-rience in planning, financial and monetary affairs, he is a capable and arti-culate manager. Of the four other members of the Management Board, two weretrained in finance, one in economics and one in engineering. Together withDr. Salgueiro's dynamic leadership they form a balanced team that is pro-viding strong and effective leadership for BFN. Middle management personnelhave been with BFN for varying lengths of time (average tenure is about tenyears), appear qualified and highly motivated and contribute substantiallyto the smooth functioning of the organization.

3.07 BFN's Head Office staff (including the Lisbon branch office) totalssome 432 people, of whom about 93 are professionals. The branch officesemploy another 186 people. The organization of BFN (see Annex 7) and itsprocedures are currently under review on the basis of an OECD-financed study.

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The basic proposal of the study is to group homogenous operations within threebasic general directorates charged respectively with lending operations, fi-nance and administration. Support departments would remain outside of thisstructure and report directly to the Board of Management.

D. Branches

3.08 BFN has a branch office in each of the district capitals on the main-land (17) and one each in the Azores and Madeira as well as one in Lisbon.Their main activity is the attraction of deposits from local savers though re-cently they have become involved in supervision (see paragraph 3.22). Thebranches also disburse funds to borrowers on instructions from the Head Officeand receive applications for financial assistance. They usually do littleprocessing of applications though, except to assist borrowers in filling outforms and to check local credit references. The proposed reorganization wouldinvolve the branches more extensively in the appraisal of small projects.

E. Objectives and Policies

3.09 Objectives. BFN's objectives are broadly stated in its Statutes aspromoting the development of the country and assisting the Government in imple-menting its economic and financial policies. Emphasis is put on stimulatingsavings and channeling them towards productive investment. BFN is empoweredto grant medium- and long-term loans, provide guarantees, subscribe to equity,bonds or other securities and undertake other operations appropriate to itsobjectives. BFN is allowed to finance projects in a wide range of sectors,public or private.

3.10 Policies. Though BFN has no formal policy statement, most of thetopics usually covered by such a statement are included in its Statutes. TheStatutes state that BFN is to finance technically and economically feasibleinvestment projects or transactions of recognized economic importance (such asexports). It has maintained its autonomy in reaching investment decisions.In the case of direct investment credit, informal guidelines established in1975 specify that usually no more than 20% of the loan can be used to financeworking capital and that upon completion of the project being financed, theborrower's equity has to represent at least 25% of total assets and 40% of alllong-term funds. Loans with terms exceeding ten years are to be consideredonly in exceptional cases. A lower limit of Esc 2 million ($52,000 equivalentat the current exchange rate) has been established for long-term loans.

3.11 One area where the Statutes provide no guidance is in the diversifi-cation of risk. In fact, though, despite a few large exposures which have anexceptional character, BFN has been following prudent policies in this regard.Its largest exposure in a single enterprise is with the Electricidade dePortugal (EdP) (Esc 3,657 million or $122 million equivalent). This exposureis due, however, to the formation in 1976 of a new national power company (EdP)which was made up of several regional electricity companies that had earlierborrowed from BFN. EdP is fully Government-owned and, on the strength of its

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competent management and sound policies, obtained in May 1976 a sixth Bankloan for power development. Most other significant exposures are with com-panies that have been nationalized or are controlled by the State. As faras BFN's equity portfolio is concerned, its total cost represents only 39%of BEN's net worth. The largest equity investment, excepting in EdP whichis included in the exposure referred to above, is Esc 200 million ($7 millionequivalent) or 6% of BFN's net worth, which is not excessive.

3.12 BFN's Statutes require that three reserve funds be maintained:the legal reserve fund, the special reserve fund and the guarantee reservefund. A least 10% of annual net profits are to be allocated to the specialreserve fund which is to cover the depreciation of assets not chargeable toprofit and loss (this fund has so far never been used). The guarantee reservefund is to cover doubtful debts; funds allocated to this reserve are to beinvested in Government securities and shown as a separate asset on the balancesheet. In addition to these mandatory reserves BFN maintains a second provi-sion for doubtful debts and an unspecified reserve fund.

3.13 BFN's Statutes limit the amount of bonds that it may issue to twotime its share capital. Bonds, however, have been a very minor source offunds for BFN. Other than this special provision there is no stated limit tothe amount of debt BFN can incur. However, BFN's management has always beenconcerned with the evolution of the debt/equity ratio. The increase of sharecapital in 1976 as well as an earlier increase in 1972 were motivated by thisconcern. BFN intends to keep the debt/equity ratio below 6 to 1 in the future,a reasonable limit given BFN's maturity and financial strength.

F. Procedures

3.14 Project Appraisal. BFN makes three types of loans: loans forcapital investment, referred to as direct credit, loans to enterprises tofinance production and sales made on credit to other Portuguese firms, andloans to producers of Portuguese goods which are sold outside of Portugal.The latter two types of loans, jointly referred to as indirect credit, areusually made only to heavy equipment manufacturers and the building sector.

3.15 BFN's Development Services Department is in charge of appraisingdirect credit projects. At September 30, 1976, 24 engineers, financialanalysts and economists were responsible for the preparation of theseappraisal reports. By the end of 1976 the department had hired twelve moreprofessionals. The collection of technical, financial and economic data isalmost always supplemented by visits to the projects. Some 15 support staffare available to assist the department in the collection of banking refer-ences, the processing of statistical data and the administrative controlof case files.

3.16 Although an appraisal report is prepared for all direct creditprojects, in the case of big public sector projects co-financed with otherdomestic (mainly CGD) or foreign financing sources, BFN relies to a greatextent on the studies carried out by the sponsoring agencies, the technicalministries and the Secretariat of State for Planning. In reviewing these

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stulies, BFN maintains an independent judgment on the merits of the projectsand their suitability for BFN financing. The main focus of BFN's appraisalwork, however, is on small- and medium-sized projects, mainly in the privatemanufacturing sector, where BFN is in a position to influence positively theformulation of the projects and any necessary restructuring of the subsector.

3.17 A large amount of BFN's lending is for indirect investment credit.Applications for these types of credit are handled by the Special CreditOperations Department which has a professional staff of six. The appraisalof these applications is generally limited to checking the adequacy of thesecurities offered and the creditworthiness of the borrower (and the purchaserof the goods if a Portuguese firm); there is no appraisal of the investmentproject as such.

3.18 Although BFN makes a more thorough appraisal of the direct creditprojects it finances than any other credit institution in Portugal, and whilein general its appraisal work is done to fairly high standards, its appraisalmethodology could be substantially strengthened. There is a general need fora more clearly defined analytical framework in which to conduct the appraisal,as well as for a more thorough analysis of the data assembled. Financialprojections are now generally made only for two or three years following thebeginning of production, and therefore do not permit the computation of theinternal financial rate of return (IFRR). In the case of expansion projects,BFN makes projections for the borrowing firm as a whole, which does not allowthe computation of the incremental impact of the project. In assessing themerits of a project from the economic point-of-view, BFN relies only onpartial indicators (often assessed in a very crude way) such as value added,number of jobs created and impact on the balance of payments, and has nottried so far to compute the internal economic rate of return (IERR) of itsprojects.

3.19 Through the proposed loan the Bank intends to assist BFN in strength-ening its appraisal standards. BFN's management is particularly eager to bene-fit from the Bank's assistance in this area. BFN has confirmed that it willcalculate the IFRR and the IERR on all subprojects above the free limit (andsubprojects below the free limit submitted to the Bank for review; see para-graph 7.05) and prepare for all subprojects submitted for financing by theBank a thorough analysis of the project's impact on employment and on thebalance of payments. Furthermore, the Government has expressed its desire tosee BFN strengthen its economic evaluation of all projects, whether submittedto the Bank or not. In furtherance of this objective, BFN has confirmed thatit will begin, in the course of the first year after loan signing, the cal-culation of the IFRR and the IERR on all of its larger direct credit projects(i.e. those involving loans or other financial assistance exceeding $1.0 mil-lion equivalent) for which the information needed is available. Moreover,BFN will seek to systematically obtain from all applicants the informationn-eded to calculate the IFRR and the IERR so that, within three years ofI n signing, it is able to make these calculations on most, if not all, such-ojects. Several steps have already been taken to enable BFN to fulfillchese undertakings and generally to upgrade its appraisal work. Three membersof BFN's staff have attended EDI courses and the organization in Lisbon, withBank assistance, of seminars on project appraisal techniques is underway. BFN

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is currently carrying out studies on shadow prices, shadow wages and conversionfactors for non-traded goods and services which are needed for the computationof the IERR. A Bank mission this summer will assist in carrying out thesestudies.

3.20 Promotional Activities. BFN has carried out useful studies of anumber of industries including marble, shoe, textile and clothing, construc-tion, heavy equipment and food processing. It has conducted regional surveyssuch as studies of the structure and economic growth of the district of Bragaand of the southern region. It has been involved in the promotion of a numberof industries including air conditioning equipment, canned fruit, constructionmaterials and truck cabins. It has carried out some pre-investment studiesand has been active in bringing together foreign and local firms in an effortto create joint ventures.

3.21 BFN plans to expand substantially its promotional activities, partic-ularly for medium and small industrial projects. It will collaborate in thisrespect with the Government agencies concerned with public sector investment,foreign investments, PMEs and displaced persons from the former overseas ter-ritories. BFN has also expressed an interest in receiving assistance in thisarea and the Bank has arranged, as a first step, contacts with other DFCs ex-perienced in project promotion.

3.22 Project Supervision. Project supervision is the responsibility of amonitoring unit comprising twelve professionals within the Control and Inspec-tion Services Department. This is one of BFN's weakest activities with theemphasis so far having been on checking the securities offered for the loanand the borrowers' compliance with loan agreement covenants. Little attentionhas been paid to technical, economic and organizational matters. Visits toborrowers have been rare after the beginning of production and financial re-porting by the borrowers has been only loosely enforced. As a result BFN haslearned of financial or other difficulties of its borrowers only when theirrepayments have gone into arrears. More recently, though, as one response tothe current serious arrears position (see paragraphs 5.06-5.08), visits toborrowers by both headquarters and branch staff have been intensified in aneffort to find solutions to the difficulties faced by borrowers.

3.23 BFN's management is aware of these deficiencies and has confirmedthat the scope of BFN's supervision work will be broadened. In the frameworkof the proposed reorganization supervision work would be taken over by a newdepartment set within the directorate charged with lending operations so as toprovide a link with appraisal and promotion work. A separate division withinthis department would be charged with monitoring the overall performance ofborrowers including identifying at an early stage those borrowers experiencingdifficulties and diagnosing their problems and technical assistance needs.BFN has also confirmed that appropriate additional staff will be recruited asnecessary to handle these new tasks.

3.24 Procurement. In the case of large investment projects BFN's clientsask for bids from qualified national or foreign suppliers, generally on thebasis of specifications prepared by engineering firms, and the bids are re-viewed carefully before a decision on procurement is taken. In the case of

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smaller projects, quotes from several sources are collected in a more in-formal way. In all cases, however, BFN's engineers check the appropriatenessof the production method, the reputation of the supplier and the competitive-ness of the prices against their own experience with similar projects. Theseprocedures are satisfactory.

3.25 Disbursement. Disbursements are made only after invoices and otherdocuments are checked and it is verified that the goods or services beingpaid for were those originally approved as part of the project. The generalpractice is to visit each client at least once during the disbursement period.In general, disbursement procedures are satisfactory.

IV. BFN'S OPERATIONS

A. Characteristics

4.01 Annex 8 contains a summary of BFN's operations since 1971. Termlending is by far BFN's most important activity. The granting of guaranteesand investing in equity participations represent only a small percentage ofBFN's approvals. BFN has not invested in bonds since the revolution.

4.02 Loans. The growth in the number and amount of lending operations(including those in the overseas territories) was quite substantial between1971 and 1973, with loan approvals growing an average 25% p.a. in terms ofnumbers and 35% p.a. in terms of amounts. In 1974 loan approvals increasedby 26% in terms of numbers but only by 3% in terms of amounts, while disburse-ments increased by 65%, reflecting ongoing investment projects that could notbe curtailed. The 19% decrease in the average size of loans approved in 1974as well as the 71% increase in the number of loan applications for that yearreflect the shift of medium and small firms from financing their investmentswith the revolving short-term credit traditionally obtained from commercialbanks to medium- or long-term investment credit obtained from BFN. Though1975 loan approvals (for Portugal only) increased by only 7% in terms ofamounts, this was in a year when GFCF declined by 39% in real terms. BFN'slending activity picked up significantly in 1976, paced by a number of largeexport credits.

4.03 Annex 9 analyzes approved loans according to several criteria.Sectorally, industrial credit has accounted for some 90% of approved loans byamounts and 85% by number since 1971. Before the nationalizations of 1975 theprivate sector received the large majority of BFN's loans. Since then the dis-tribution between the public and private sectors has changed and, in the firstsix months of 1976, only 51% of the amounts approved was for the private sectorwith 24% for public enterprises and 25% for enterprises with a controlling gov-ernment participation.

4.04 The size of approved direct credit since 1971 varies from Esc 100,000($3,300 equivalent) up to Esc 600 million ($20 million equivalent); some in-direct credits are larger. While over half of the amount approved each year(except 1971) has been for loans exceeding Esc 100 million ($3.3 million equiv-alent), 70% or more of the loans have been for amounts below Esc 10 million

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($330,000 equivalent). The largest loans have been for shipyards, equipmentmanufacturing, petrochemicals and electricity projects. A rough evaluation ofthe relative importance of PMEs among BFN's clients shows them as accountingfor about 90% of the loans in terms of numbers and between 30% and 40% in termsof amounts, with a slightly increasing trend in the more recent years. Theaverage size of direct industrial loans, excluding those for electric power,has been about $400,000 equivalent.

4.05 The geographical distribution of loans reflects the geographicaldistribution of economic activity in Portugal. Thus the majority of loansare for projects in the industrialized coastal strip from Viana do Casteloin the north to Setubal in the south, including the Lisbon area. However,BFN has supported projects in just about all sections of Portugal, includingthe adjacent islands. The majority of loans, in terms of numbers and amounts,have been for terms of five to seven years, while 34% of the amount lent,though only 4% of the number, have been for longer terms.

4.06 New clients accounted for 84% of the direct credit operations ap-proved in 1975 and 64% of the amounts involved, again reflecting the shift ofmany small and medium enterprises away from commercial banks and towards BFN.Preliminary figures for 1976 suggest that this movement is continuing. On theother hand, new projects (new enterprises or new activities undertaken byexisting enterprises), which in 1974 represented 16% of approved direct creditloans and 32% of the amounts involved, represented only 6% of the loans in1975 and 16% of the amounts, reflecting the uncertain investment climate. Thepredominance of loans for extension or modernization investments is confirmedby preliminary figures for 1976.

4.07 Equity Investment. As shown in Annex 10, the main sectors in whichequity investments have been made are electricity, transportation, metalworks, chemicals and banking. Following the nationalizations of 1975 theState has acquired a controlling interest in the majority of the firms inwhich BFN has an equity participation. The fact that very few medium andsmall enterprises are included in BFN's equity portfolio reflects in partthe reluctance of these traditionally family-owned enterprises to open theirequity ownership to outsiders.

B. Economic Impact

4.08 Over the four years preceding the revolution gross fixed capitalformation (GFCF) in Portugal totalled Esc 172 billion ($5.7 billion equiv-alent), including Esc 51 billion ($1.7 billion equivalent) for manufacturing.Estimated on the basis of disbursements for direct credit and for credit forproduction and sale within Portugal, BFN's contribution to the financing ofthis investment activity was 5.8% for the economy as a whole and 19.7% for themanufacturing sector. While overall investment activity declined in 1974 and1975, BFN's contribution to total GFCF increased to 8.2% in 1974 and 12.7%in 1975 (14.4% for the manufacturing sector in 1974 and 25.8% in 1975). Pre-liminary figures for 1976 suggest that BFN's contribution to overall fixedcapital formation decreased to 11.3%. The high percentages for 1975 and 1976should, however, be considered as exceptional.

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4.09 Annex 11 gives a breakdown of loan approvals for direct credit in1975 and 1976 according to total project cost. It shows that in these two

years 94% of the number of loans and 35% of the amount were lent for projectswith a total cost of less than Esc 100 million ($3.3 million equivalent).These percentages further confirm the importance of PMEs in BFN's lendingactivity.

4.10 A recent study by BFN showed that in a sample of manufacturing proj-ects involving direct credit in 1975 of over Esc 50 million ($1.6 millionequivalent), 44% of the total investment was financed by suppliers credit and17% by internally generated funds. The corresponding percentages for a sampleof projects involving smaller loans were 21% and 35%, suggesting a lesseravailability of suppliers credit for PMEs or the imposition by lenders of morestringent financial ratio requirements. In both samples, commercial banksaccounted for less than 8% of the financing and BFN for about one-third.

4.11 This analysis also indicates that for large manufacturing projectsthe job creating impact was very limited (cost per job above $200,000 equiv-alent). It can be argued that these investments, whose usual objective wasto increase productivity, were necessary to ensure the firms's survival fol-lowing changes in factor prices and international conditions and thereforeto maintain existing jobs. In the sample of small and medium manufacturingprojects the investment cost per job created was much lower, around $20,000equivalent, reflecting the capacity of PMEs to create jobs at a substantiallylower cost. Although no precise figure is available, BFN lending to PMEs isalso important in maintaining existing jobs.

V. BFN'S FINANCIAL SITUATION

A. Resource Position

5.01 An important shift in BFN's resource position has occurred sincethe revolution. This is reflected in Annex 12 which shows, on an annual cashflow basis, the sources of funds used to cover disbursements. Until the re-volution BFN had relied predominantly on time deposits which made up almosthalf of its resources at the end of 1973. Loans from the Government made upanother quarter with equity providing about 14%. Following the revolution,the considerable increase in BFN's loan portfolio, combined with a stagnationin time deposits (until 1976 when deposits rose 20% over the previous year),obliged BFN to increase dramatically its discounts with the Central Bank.These rose from Esc 0.4 billion ($13 million equivalent) at the end of 1973to Esc 10.9 billion ($363 million equivalent) at the end of 1976 when theyaccounted for 35% of total resources, the same as time deposits. BFN's re-source position as of December 31, 1976, is presented in Annex 13. It showschat only 3.6% of the total is available for disbursements and that resourceshave been somewhat over-committed. BFN expected to cover its position andmeet new commitments by repayments, a capital increase being negotiated withthe Government, new deposits and new foreign currency loans.

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5.02 There is no theoretical limit to the amount that BFN can draw fromthe Central Bank and it benefits from the relatively low cost of these funds.In the future BFN plans to reduce its reliance on Central Bank discounts inline with the Central Bank's policy. One way it will do this will be toborrow much more than in the past from CGD which has substantial liquid fundsto invest.

5.03 Until the revolution, BFN made little effort to raise funds outsideof Portugal and the overseas territories. This reflected the country's bal-ance of payments surplus and the consequent availability of foreign exchange.With the sharp deterioration of the balance of payments over the last severalyears, BFN has been under pressure to raise foreign exchange resources and hasdone so with success (see Annex 13 for details). It has raised two lines ofcredit from the Midland Bank and one from Credit Commercial de France andmore recently received a syndicated Eurodollar loan. On these four lines ofcredit, however, sub-borrowers are to bear the foreign exchange risk (with areduction in the interest rate).

5.04 BFN is also the recipient of a loan from the European InvestmentBank (EIB) which was contracted within the framework of the EEC offer ofemergency aid for Portugal in the 1976-77 period. This loan, on which theGovernment carries the foreign exchange risk, is expected to be fully com-mitted by the end of 1977. In negotiating this loan, EIB used its influenceto strengthen BFN's financial and technical autonomy and to press for a favor-able settlement of BFN's arrears and overseas assets problems (see paragraph5.12). BFN's standing in Portugal's financial community is reflected by itsbeing chosen to manage an Industrial Development Fund of about $100 millionequivalent made available to Portugal by the members of EFTA (which includesPortugal) as well as by Finland. The Fund became effective at the beginningof February 1977.

B. Quality of Portfolio

5.05 BFN's portfolio at the end of 1975 amounted to Esc 26.8 billion($894 million equivalent); BFN had the financial risk on 91.2% of the total,with the remainder made with funds at the risk of the Government. Annex 14divides BFN's risk portfolio at December 31, 1975, into loans (95.1%), shares(4.4%) and bonds (0.5%), and indicates that 7.6% of the total was investedin the former overseas territories (excluding investments made by BFN'sbranches there).

5.06 Loan Portfolio. The difficulties faced by Portugal's economy sincethe revolution are reflected in the steady increase of arrears. As of June30, 1976, (see Annex 15 A) BFN's total loan portfolio of some 1,560 loans in-cluded 590 loans affected by arrears, out of which 461 had arrears of overthree months and accounted for 25.4% of the portfolio. Total principal andinterest payments in arrears totalled Esc 2,112 million ($70 million equiv-alent) or 8% of the portfolio, compared to Esc 671 million or 3.8% as ofDecember 31, 1974. Provisions for doubtful debts were Esc 926 million andother reserves, Esc 1,091 million (a total of $67 million equivalent), asof June 30, 1976.

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5.07 Of the amounts in arrears 44% were in the public sector, 22% wereamong overseas entities and 34% were in the private sector. At the request ofBFN, the Government has agreed in principle to arrange for each public sectorenterprise to submit a definite financial plan for repaying its outstandingarrears (with respect not only of BFN but also of other creditors) over afixed period of time. Arrears on loans to overseas entities are part of theoverseas assets problem and are covered by the Government assurances to BFNconcerning these assets (see paragraph 5.13). BFN has contacted most of theprivate companies in arrears, and has proposed to those of them thought notto be in a position to repay their arrears immediately a scheme providingfor (a) resumption of principal repayment after a new grace period of sixmonths, (b) payment within these six months of interest in arrears and (c)upward adjustment of the interest rate in line with the higher maximum ratesallowed by the Central Bank on loans with longer terms.

5.08 In early 1977 BFN assessed the first results of its efforts to clearthe arrears situation. These results, reflecting the situation as of September30 and December 31, 1976, are shown in Annex 15 B. Although total arrears in-creased from Esc 2,112 million to Esc 2,706 million during the second half of1976, their rate of growth declined substantially in the fourth quarter andinterest in arrears was almost stabilized. A substantial decrease was alsoachieved during the fourth quarter in the arrears of public and nationalizedenterprises. Although private sector arrears continued to increase substan-tially in the second half of 1976, preliminary indications for the first monthsof 1977 are more encouraging and suggest that BFN's efforts (including inten-sified field visits to enterprises in arrears by staff from headquarters andbranches) are beginning to bear fruit. The Government has confirmed that,without prejudice to the interest of other creditors, it will review with BFNby March 31, 1978, the financial ability of defaulting public sector enter-prises to meet their obligations to BFN and will take adequate measures tocompensate BFN for those loans that cannot be repaid. BFN has also confirmedthat it will by December 31, 1977, establish quantitative targets and time-tables for the reduction of private sector arrears and that it will closelymonitor the progress on achieving these targets.

5.09 Equity and Bond Portfolio. The companies located in Portugal inwhich BFN holds equity participations are generally solid and well-managedenterprises. Although very few are currently distributing dividends, mostof them, whether Government-controlled or private, have favorable earningspotential. Interest on BFN's Portuguese bond portfolio is being paid ontime.

C. Financial Performance and Position

5.10 Profitability. BFN's income statements for 1971-76 are contained inAnnex 16. Income has shown a 27% p.a. increase during the 1971-74 period, a73% increase in 1975 and a 57% increase in 1976, 1/ basically reflecting thegrowth in interest income. This in turn reflects the growing loan portfolioplus the increase in interest rates which BFN can charge. Expenses, however,

1/ 1975 and 1976 figures refer to Portugal only; 1971-74 figures include theoverseas territories.

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have grown at the more rapid rate of 35% p.a. during 1971-74 and 74% in 1975.Total expenses in 1976 depend upon the Minister of Finance's decision regardingthe amounts to be allocated to the provision for doubtful debts; see footnote2 of Annex 16. The main cause for this growth has been interest expense; notonly have the amounts borrowed increased but also interest rates have gone up.Profits before taxes increased at a 21% p.a. rate between 1971 and 1973 butsharply declined in 1974 and 1975 when substantial provisions for doubtfuldebts were made; the same situation is likely to occur for 1976.

5.11 Administrative expenses, while increasing in absolute terms, havenot significantly increased as a percentage of average total assets andamounted to only 0.5% during 1976 (see Annex 19). This result is among thelowest of the DFCs associated with the Bank and reflects to some extent therather modest professional staff size. Net profit as a percentage of averagenet worth declined over the 1971-73 period, reflecting the faster growth ofnet worth (helped by the 50% increase in share capital in 1972), and amountedto 5.1% in 1973. It dropped to 0.3% in 1974, reflecting the high provisionfor doubtful debts, and recovered somewhat to 3.6% in 1975. It dropped to3.3% in 1976 due to the capital increase and the proposed large provision fordoubtful debts. Over the 1971-73 period, the payout ratio fluctuated between53.6% and 67.9%, reflecting a reasonably conservative reserve policy. Nodividends have been paid since BFN was nationalized.

5.12 Financial Position. BFN's balance sheets as at December 31 for eachof the six years 1971-76 are contained in Annex 17. Total assets have in-creased from Esc 12.8 billion ($425 million equivalent) at the end of 1971 toEsc 37.4 billion ($1,246 million equivalent) at the end of 1976. 1/ In eachyear the investment portfolio represented about 90% of total assets. Thisgrowth was financed through increases in all major liability categories al-though, as noted earlier, their relative importance has changed over time.

5.13 Overseas Assets and Liabilities. BFN's net overseas assets, es-timated at approximately Esc 1,700 million ($56 million equivalent), areincluded in the "other assets" item of BFN's balance sheet. In the courseof 1976 separate agreements were reached at the Government level betweenPortugal and its smaller former African territories of Guinea-Bissau, CapeVerde and Sao Tome and Principe. Under these agreements, BFN is to receivefrom the respective governments an adequate compensation for the takeover ofthe net assets of its branches there. In the case of Mozambique, where thenet assets of BFN's branch are estimated at Esc 956.4 million ($31.9 millionequivalent), BFN has continued to supervise its assets and liabilities sinceMozambique's independence although no new investment operations have beenundertaken. BFN is represented in the negotiations currently under way be-tween the governments of Portugal and Mozambique and expects to be compensatedalong the lines adopted for the three smaller territories. In the case of

1/ 1976 figures refer to Portugal only while figures for earlier years in-clude the overseas territories. This difference does not affect sig-nificantly the trends described as the structure of overseas assets andliabilities was roughly similar to that for Portugal only.

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Angola, BFN ceased all activities in March 1976, the operations there beingmanaged by a locally appointed management team. Diplomatic relations werereestablished between Portugal and Angola in September 1976 but no negotia-tions have yet been scheduled that would include the disposition of BFN'sassets and liabilities. BFN's net exposure in Angola is estimated at Esc727.7 million ($24.3 million equivalent). The Government has confirmed thatin its negotiations with the Governments of the former overseas territoriesit will seek agreement on the payment of adequate compensation by thoseGovernments for these net exposures, as well as on the settlement of arrearson loans made to enterprises in those territories.

5.14 Debt/Equity Ratio. After adjustments as detailed in Annex 18, BFN'sdebt/equity ratio as of the end of 1976 was 6.9 to 1, having increased from4.8 to 1 at the end of 1971. It is BFN's intention to bring this ratio below6 to 1 through capital increases (Esc 1 billion was paid in by the end of1976 and a further Esc 0.5 billion is being negotiated for 1977) and throughthe conversion into equity of about Esc 1 billion of debt to the PortugueseState (also being negotiated for 1977). Included in the debt to be convertedare the adjustments made in Annex 18. In line with BFN's intentions (see alsoparagraph 3.13), a maximum debt/equity ratio of 6 to 1 was agreed to duringnegotiations.

D. Audit

5.15 As noted in paragraph 3.04, BFN engaged Price, Waterhouse and Co. tocarry out a full audit of the 1976 financial statements. This was the firsttime BFN's financial statements were subjected to an independent audit. Thereceipt of a satisfactory audit report, expected shortly, is a condition ofloan effectiveness. BFN has agreed to continue to use a satisfactory inde-pendent accounting firm for future annual audits.

VI. PROSPECTS

A. The Environment

6.01 Economic Environment. A definite potential exists for the revivalof the Portuguese economy. The return of internal political stability, animproved international economic environment, the recent devaluation of theescudo and the accompanying economic policy measures have created more favor-able circumstances than have existed since the revolution and the presentGovernment is committed to putting the country firmly on the path of economicrecovery. The Government's economic strategy aims essentially at redirectingresources away from private and public consumption and imports and towardslivestment and exports. This strategy, which is appropriate in the presentontext and was already outlined in the Government's Program of August 1976,is spelled out in more detail in the 1977 Plan, the 1977 Budget and theFebruary 1977 policy package. The 1977 Plan somewhat optimistically projectsincreases in real terms of 5% for GDP, 7% for industrial output, 11% forexports and 33% for investment. Private and public consumption are notforecast to increase in real terms. Prices and wages policy would seek to

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bring the rate of inflation down to 15%. 1/ A combination of import controlsand incentives for exports, tourism and workers remittances is expected toreduce the balance of payments deficit on current account to about $700 million.These targets are ambitious but not unobtainable.

6.02 Investment Targets for 1977. The projected distribution of thetotal investment target for 1977 of Esc 95 billion ($3.2 billion equivalent)is heavily weighted in favor of the public sector which the Government countson to spearhead the recovery of investment. Public infrastructure investmentis expected to reach Esc 31 billion (including 50% for housing) and investmentby public sector enterprises (collectively referred to as PISEE), Esc 35 bil-lion, while the private sector is expected to contribute Esc 29 billion, i.e.about 30% of the total. The 1977 PISEE is not yet finalized and furtherselection must be made from a list of investment projects involving totalexpenditures in 1977 of Esc 55 billion. Of this total, 46% would be forheavy manufacturing industries. New jobs created would total about 25,000in 1977, a fairly small amount compared to the about 100,000 new jobs asso-ciated with infrastructure investments. Although all PISEE projects takentogether would imply equipment imports worth about Esc 5.5 billion ($180 mil-lion equivalent), their long-term impact on the balance of payments would bepositive, yielding an estimated Esc 18.4 billion ($610 million equivalent)in annual net earnings. As for the financing of PISEE, contributions areexpected from the public sector enterprises themselves, various public sectorfunds, the banking system (and in particular CGD and BFN), suppliers credit,the EFTA Industrial Development Fund and other foreign lines of credit. Noquantification of these contributions has been attempted so far.

6.03 The 1977 Plan does not include any sectoral breakdown of the invest-ment expected by the private sector. As noted in Chapter II and Annex 1, how-ever, the Government is determined to assign an important role to the privatesector and to restore the confidence of domestic and foreign private investors.The measures in that direction already indicated in the Plan and included inthe February 1977 policy package (in particular compensation for nationaliza-tions, revaluation of assets and loan consolidation schemes for economicallyviable enterprises) could create, if properly carried through, the conditionsfor achieving the private sector investment target.

6.04 Medium-Term Prospects. The process of economic reconstruction andreform in Portugal will only be completed over a period of several years. How-ever, assuming appropriately implemented measures, the Bank's economic reportprojects that Portugal could be able to achieve in the 1977-82 period a GDPgrowth rate of about 5% p.a., sustained by an average increase in investmentof about 13% p.a., while the current account balance of payments deficitwould progressively decline and disappear in the 1980's. The performanceof the industrial sector is the crucial variable in the achievement of thesetargets as only the industrial sector can provide the motive force for thisgrowth and lead to the expansion of exports. It will also have an important

1/ The target for inflation might have to be revised upwards somewhat as aresult of the February devaluation of the escudo, higher import surcharges,the decontrolling of some prices and the increases in utility rates.

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role in alleviating the unemployment problem. Recognizing this, the Govern-ment has indicated that the industrial development strategies to be articu-lated in the Medium-Term Plan (1977-80) 1/ will place more emphasis on labor-intensive and export-oriented industries.2/ As noted in Chapter II and Annex1, these industries are mainly in private hands.

6.05 In the perspective of Portugal's application for membership in theEEC, the private sector is better placed than the public sector to find amiddle ground between the highly capital-intensive and technologically ad-vanced industries of the developed European countries and the unskilled labor-intensive industries of the countries of the Lome Convention and of NorthAfrica, which can export manufactured goods duty-free to the EEC. Despite therecent increases, labor costs in Portugal are still substantially below costsin the developed European countries though exceeding those in African coun-tries. The predominantly capital-intensive products of Portugal's public sec-tor, such as petrochemicals, fertilizers, steel and cement, seem to offer fewopportunities for export to the EEC. On the other hand, with some upgrading,the traditional labor-intensive exports of textiles, clothing, shoes, andprocessed foods appear to hold better prospects. But the best possibilitiesappear to lie in industries producing light and heavy machinery as well as inship-building and ship-repair, where skilled and semi-skilled Portugueseworkers can utilize modern techniques. Some of these industries, such asmachine tools, may produce final goods for European or Third World marketswhile others may engage in sub-contracting, benefiting from the tendency inthe more developed European countries to shift from the importation of laborto that of parts, components, and accessories. The Government is aware ofthese opportunities and, at its request, the Bank organized in April/May anindustrial sector mission which gave particular attention to ways to expandindustrial exports (see paragraph 2.08).

B. Projected Operations

6.06 Annexes 20 to 25 present BFN's operational and financial projec-tions for the five-year period 1977-81, as well as the major underlyingassumptions. The forecast of operations is based partially on BFN's pipe-line of projects and assumes that BFN's contribution (including that of theEFTA Fund it manages) to GFCF in Portugal will be about 7.5% p.a. over thecoming years while GFCF itself is assumed to increase at 15% p.a. Thislatter assumption was based on the Bank's preliminary projections availableat the time of the appraisal mission which have since been revised downwardsto a growth rate of 13% p.a. However, BFN's contribution to GFCF in 1976 has

1/ The Medium-Term Plan will include development strategies for each indus-trial subsector. These strategies are being prepared now for discussionswith representatives of the public and private sectors in the spring of1977 and for incorporation in the Plan which is scheduled for submissionto the Assembly later in 1977.

2/ The Government is also studying the scope for efficient import-substitution in selected industrial subsectors.

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exceeded its forecast, and it appears likely that the 7.5% p.a. projected forthe future may also be exceeded. The level of BFN's projected operationsappear reasonable.

6.07 Total commitments are forecast to grow from Esc 7.9 billion ($263million equivalent) in 1977 to Esc 15.1 billion ($504 million equivalent) in1981. Total direct credit commitments are forecast to grow from Esc 4.1 bil-lion ($136 million equivalent) to Esc 7.9 billion ($262 million equivalent)over the same period. Imported goods and services, based on past experience,are expected to represent 35% of the total. While in the past most of BFN'sloans were for terms of between five and seven years, the average term offuture loans may be longer as BFN becomes more involved in promotionalactivities.

C. Resource Requirements

6.08 For its future local currency requirements BFN expects to rely ontime deposits, certificates of deposit, retained earnings and share capitalincreases. Its use of the Central Bank's discount facility is expected tobe reduced significantly. While the projected growth of time deposits is inline with increases experienced before the revolution, the issuing of certi-ficates of deposit would represent an innovation. The terms and conditionsof this new financial instrument are expected to be approved by the Governmentin 1977. These certificates are, however, likely to have a term of betweentwo and five years. BFN anticipates placing this paper mainly with financialinstitutions with excess liquidity, in particular CGD.

6.09 During the two-year period July 1977 to June 1979, when the proposedBank loan is expected to be committed, BFN forecasts that its overall commit-ments for foreign currency loans will total about $225 million equivalent.The proposed Bank loan, however, would be limited to direct credit to indus-trial projects. Indirect credit is excluded as BFN does not appraise theactual project involved (see paragraph 3.17). The focus on industrial proj-ects is aimed at maximizing the impact on this important sector. No distinc-tion is made within this sector as to the size, ownership or subsector of theprojects that can be submitted to the Bank so as to provide BFN with maximumflexibility in committing the proposed loan quickly. However, BFN will in-clude an analysis of the project's economic impact and has undertaken to submita representative mix of projects in terms of size of enterprise and subsector.

6.10 The foreign currency component of direct industrial credit committedduring the two years beginning July 1977 is forecast at $95 million equivalent.The proposed Bank loan of $50 million would provide 53% of this amount, thoughonly 22% of BFN's total foreign currency requirements. With the existingforeign currency loans expected to be fully committed by the end of 1977,BFN still must secure substantial additional foreign resources. While asecond EIB loan is a possibility, BFN is also studying various other optionsto further diversify its sources of foreign exchange including a new Euro-market loan. BFN's management has expressed interest in the possibilityof using the present appraisal report (and perhaps also the Bank's economicreport) to help in arranging such a loan.

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D. Financial Prospects

6.11 The projected financial statements indicate that interest income isexpected to grow rapidly, mainly reflecting the growth in the outstanding loanportfolio. BFN's average lending rate is conservatively projected at 11.5%throughout the 1977-81 period and the average cost of borrowings, includingdeposits, at 9.5%, allowing BFN a satisfactory spread of 2%. The lower growthrate of interest expense reflects the expected decrease in the debt/equityratio. Administrative expenses are projected to increase at 16.5% p.a., thesame increase projected for the loan portfolio, reflecting staff additionsand normal increments. The overall result is that gross profit is expectedto increase from 8.8% of net worth in 1977 to 12.6% in 1981. No dividendsare projected during the 1977-81 period, which is acceptable to the Government.

6.12 The debt/equity ratio is forecast to decrease from 6.9 to 1 at theend of 1976 to 5.1 to 1 at the end of 1981. The forecast 1977 capital in-crease of Esc 1,500 million is already being negotiated with the Government.Future capital increases are timed to maintain a debt/equity ratio of lessthan 6 to 1. Interest coverage is expected to be maintained at between 1.2and 1.3 over the 1977-81 period. Arrears are assumed to have reached theirpeak in 1976 and are expected to decline in future years; the annual provi-sion for doubtful debts is forecast at a satisfactory level.

VII. THE LOAN - ITS OBJECTIVES, JUSTIFICATION AND FEATURES

7.01 The objectives of the proposed loan to BFN would be:

(a) on country grounds, to provide a transfer of resources toease the foreign exchange constraint faced by Portugal;

(b) to contribute to the recovery of industrial sector invest-ment with particular emphasis on industrial projects witha high employment and export potential; and

(c) to provide institution building assistance, as requested bythe Government and BFN, for the improvement of appraisaland other procedures so as to enhance BFN's impact on theindustrial sector.

In addition, the proposed Bank loan may also serve as a catalyst for otherforeign lending to BFN.

7.02 As noted earlier there is an imperative need for Portugal to reduce.Its balance of payments deficit. The proposed loan would help to achieveLhis objective not only through a resource transfer that might also attractother potential lenders, but also through the financing of industrial projects,most of which are expected to show a high potential to earn or save foreignexchange. Furthermore, as noted in Chapter VI, good prospects exist for thedevelopment of a number of industrial subsectors in which Portugal still has

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a comparative advantage and where there is a significant potential for jobcreation. These subsectors include a substantial number of PMEs whose eco-nomic and financial viability can be restored through appropriate restructuring.

7.03 Regarding the institution building objective, BFN's management hasexpressed a keen interest in receiving technical assistance from the Bankwhich it feels is as important as the Bank's financial assistance, a viewreiterated by the Government on several occasions. Bank assistance towardsthe development of improved appraisal methodology, and hence project selection,is anticipated as the main area of focus. Such assistance would be providedto BFN not only through the process of subproject review but also throughmissions and support to BFN's internal training programs.

7.04 BFN has adopted a strategy statement outlining the objectives ithopes to achieve during the 1977-78 period; it is attached as Annex 26. Threebasic objectives emerge:

(a) contribution to economic recovery and to solving theunemployment and balance of payments problems;

(b) improvement in BFN's capacity to mobilize domestic andforeign financial resources; and

(c) strengthening of BFN's organizational structures, internalprocedures and working methods.

These objectives are well balanced and steer BFN's course in the right direc-tion. They are worthy of Bank support and the proposed Bank loan will helpto achieve all three of them.

7.05 The proceeds of the proposed loan will be used to cover the foreignexchange cost of directly imported goods and services as well as the foreignexchange component of locally procured imported goods (estimated at 50% onaverage) and of locally produced goods (35%) for industrial projects receivingdirect credits from BFN. Particularly worthy projects from other sectorsthat have an industrial component might be included on an exceptional basis.Individual subloans are limited to a maximum of $3.0 million equivalent. Thefree limit is $600,000. Instead of establishing an aggregate free limit BFNhas confirmed that it will submit full documentation for between 15 and 20projects, whether above or below the free limit, to the Bank for review,with the majority being submitted during the first year of the loan. Thisreflects BFN's desire to benefit from the Bank's experience in appraisalwork so as to improve its own.

7.06 The usual adjustable composite amortization schedule is proposed sothat repayments to the Bank by BFN are matched by repayments BFN receives fromits borrowers. The maximum term of individual subloans is twelve years. Thiswill ensure that the entire Bank loan is repaid within 15 years, though mostof the loan will be repaid much sooner given the usual shorter term of subloans.The Loan Agreement provides that BFN will prepare a Project Completion Reportonce the proposed loan is fully disbursed. Other terms of the proposed loanare those normally applied to DFC borrowers. The estimated schedule ofdisbursements is shown in Annex 27.

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VIII. AGREEMENTS REACHED AND RECOMMENDATION

8.01 During negotiations agreement was reached on the following principalissues:

(a) the operation and future of the Exchange Risk Guarantee Fund(paragraph 2.13);

(b) the strengthening of BFN's appraisal work (paragraph 3.19);

(c) the strengthening of BFN's supervision work (paragraph 3.23);

(d) the reduction of arrears (paragraph 5.08); and

(e) the payment for overseas assets and liabilities (paragraph 5.13).

8.02 Subject to the condition of effectiveness described in paragraph5.15, the project is suitable for a Bank loan of $50 million to BFN on theterms outlined in paragraphs 7.05 and 7.06.

ANNEX 1Page 1

PORTUGAL

The Environment for BFN's Operations

A. The Economic Environment

1 In the five-year period preceding the revolution of April 25, 1974,Portugal's real GDP grew at an average annual rate of 7%. This growth wassustained by a relatively high rate of gross fixed capital formation (GFCF)averaging some 20% of GDP and accompanied by a strong export performance withexports increasing at a rate of about 9% p.a. in real terms. In 1973 GDP atmarket prices was $11.4 billion equivalent, total GFCF, $2.3 billion equiv-alent, and exports, $1.7 billion equivalent. The development strategy favored,however, a very skewed distribution of income and wealth, and neglected theimportant agriculture and education sectors while, due to the predominanceof capital intensive investment, the industrial sector was unable to absorbPortugal's increasing labor force, part of which had to seek work abroad.

2. The revolution sought to shift the distribution of income in favorof the urban and rural working class and to transfer economic power from asmall number of powerful companies and families to the State. However, theunsettled labor situation and the political uncertainties characterized by sixchanges of Government in the first 18 months following the revolution, to-gether with the recession in the economies of Portugal's major trading part-ners, the partial loss of overseas markets following a rapid decolonizationprocess and the substantial increases in the prices of Portugal's imports,adversely affected the performance of the Portuguese economy in 1974 and 1975.The rate of growth of GDP slowed down in 1974 and became negative by about 3% in1975, the sectors suffering most being construction, manufacturing and tourism.GFCF declined by 3% in 1974 and 39% in 1975, reaching a low level of 12% ofGDP. A very high level of both private and public consumption, exceeding GDPin 1975, pushed gross domestic savings to negative levels and reduced nationalsavings (which include remittances from Portuguese workers abroad) to a lowlevel of 6% of GDP in 1975. A certain improvement materialized in 1976 withsmall increases in GDP and GFCF and gross domestic savings becoming again posi-tive. Besides a high rate of inflation estimated at about 22% for 1976, themost serious problems which the policy makers are now facing, though, are theunprecedented level of unemployment and the sharp deterioration of Portugal'sbalance of payments position.

3. Unemployment. There were at the end of 1976 about half a millionunemployed persons in Portugal, 14% of the labor force. This very high levelof unemployment was produced by a combination of external factors which haveadded to the supply of labor (the influx of about 500,000 displaced personsfrom the former overseas territories, the drastic decline in the traditionalemigration due to restrictions and lack of demand in European countries forimported labor, and the demobilization of the armed forces) and of internalfactors which have prevented the demand for labor to expand (the unfavorablelabor relations climate, uncertain export markets, sharply rising unit laborcosts, falling profit margins and acute liquidity problems). On the other

ANNEX 1Page 2

hand, trade union pressures, legislation against dismissals and in some casesState intervention 1/ prevented many enterprises facing financial difficultiesfrom discharging part of their labor force or closing down altogether. Thecost of such measures, however, has been to create widespread underemployment.

4. Balance of Payments. Portugal's trade deficit in 1976 reached $1.7billion (compared to $0.9 billion in 1973), while the deficit on the currentaccount balance slightly exceeded $1.0 billion (compared to a surplus of $0.3billion in 1973). The sharp deterioration of the trade balance reflectshigher imports of food and other consumer goods, a declining export performanceand a deterioration in the terms of trade (10% in 1975) associated mainly withthe increase in the price for imported oil and raw materials. Exports declinedin real terms by about 11 and 15% in 1974 and 1975 respectively though theyappear to have somewhat increased in 1976. The poor export performance is theresult of a combination of external and internal factors: world recession,lack of confidence of foreign clients, sharp decrease of demand from theformer overseas territories and deterioration in price competitiveness ofPortuguese exports following the sharp rise in labor costs.

5. Recovery Measures. To cope with the deterioration of the economicsituation and to initiate the long term adjustments necessary to resumegrowth in the economy, the Government introduced in early 1976 a courageouspackage of austerity measures aimed at containing private and public con-sumption as well as imports while a more favorable climate was restoredto encourage investment and exports. This set of measures was confirmedand expanded in the program of the first constitutional Government (theGovernment's Program) which was approved by the Assembly of the Republicin August 1976. The Government's Program includes a comprehensive statementof the Government's economic philosophy which blends public and privateinitiative in the achievement of priority goals to be established by thePlan. A one-year Plan for 1977, approved by the Assembly in December 1976,outlines more detailed macro-economic targets and policy measures designedto revive the economy. On February 26, 1977, the Government officially de-valued the escudo by 15% 2/ as part of a comprehensive economic policy packageexpected to improve the balance of payment situation and to stimulate the re-covery of the economy.

B. The Industrial Environment

6. Industrial Structure and Performance in the Past. Manufacturingindustry was the leading sector in the Portuguese economy during the 1960'sand early 1970's. Value added grew at an average rate of about 10% p.a. from1968 to 1973 when it reached $3.6 billion equivalent or 35% of GDP at factoroost. In the same year manufacturing industry, operating at 85-90% of

1/ In 1974 and 1975 State intervention was prompted in about 250 privateindustrial enterprises by serious financial or labor relations problems.Such intervention is now being phased out.

2/ The new exchange rate is 1 US$ 38.73 compared to 1 US$ 32.92 on the eveof th devaluation.

ANNEX 1Page 3

capacity on average, employed 868,400 people or 28% of the labor force andaccounted for exports of $1.3 billion equivalent, over 70% of the total.GFCF was about $650 million equivalent or 28% of the total. 1/ This remarkableperformance took place, however, within a seriously unbalanced industrialstructure. Growth was concentrated in a relatively small number of large andmodern enterprises enjoying privileged access to credit and foreign technology,while the vast majority of medium and small enterprises, accounting for thebulk of industrial employment, were given little assistance and few incentivesto modernize and reach adequate dimensions. All this occurred in a context ofartificially low wages (supported by a ban on trade-union activities), cheapraw materials and energy, restrictive industrial licensing (only somewhatrelaxed in 1970), protective tariffs and privileged conditions for Portugueseexports in the former overseas territories. As a consequence of this patternof development, the manufacturing sector remained highly fragmented 2/ andmanufacturing employment grew by only 0.5% p.a. during 1963-73.

7. This unbalanced industrial structure proved particularly vulnerableto the profound changes in the domestic and international environment thatoccurred in 1974 and 1975. While the performance of many large firms wasaffected by sluggish export markets, disruptions in labor relations 3/, stateintervention or outright nationalization, most of the small and medium enter-prises were plunged into a serious liquidity crisis by the sharp increasesin nominal wages 4/ and in the cost of energy and raw materials while theyfaced increasing difficulties in rolling over their short-term bank credit.Manufacturing output increased by only 2% in 1974 and fell by 5% in 1975.Capacity utilization dropped to 80% in 1974 and to between 65 and 75% in 1975.Problems of absenteeism, the inability of enterprises to discharge workersand a shorter work week made industrial labor productivity decrease by 4% in1975 while industrial employment stagnated. Manufacturing exports decreasedby 10% in 1974 and 13% in 1975. The drop in profits combined with politicaluncertainties caused domestic and foreign private investment to come almostto a standstill.

8. The Public Sector. Following the nationalization in March 1975of the most important firms (with the exception of those that were foreign-owned) in steel, oil refining, chemicals, cement, shipbuilding, beer and

1/ The growth rates of the various manufacturing subsectors over the1968-73 period, and in 1974 and 1975 are given in Table 1 attached.The respective contributions of these subsectors to gross valueadded in 1973 are given in Table 2.

2/ Of about 43,000 manufacturing enterprises in 1974 almost three-quarters employed less than five workers, and only about 1,500employed more than 100.

3/ Besides demands for improved terms of employment, union militancyled to interference in management.

4/ Nominal wages in the manufacturing sector increased by 38.5% in1974 and 25.0% in 1975.

ANNEX IPage 4

tobacco, about 9% of Portuguese manufacturing output is now produced bypublicly owned firms. With the simultaneous nationalization of banks andinsurance companies, the Portuguese State has acquired a controlling interestin firms producing another 2% of output and it holds minority participationsin firms accounting for 5% of output in the manufacturing sector. The firmsunder various degrees of State control, however, account for about 34% offixed capital formation in the manufacturing sector though only 12% ofemployment 1/, reflecting their higher than average capital intensity. Fol-lowing a period of improvisation, and alarmed by the substantial deficitsexperienced by several important nationalized enterprises, the Government isnow taking suitable steps to reorganize the vastly expanded public sector andto restore its financial equilibrium.

9. Realizing that some time might be needed before a strong revivalin private investment materializes, the Government is counting on publicsector enterprises to launch ambitious investment programs that would spear-head the recovery of the whole economy. This effort is hampered by the lackof experience of public sector managers in project preparation, appraisaland implementation. Also, some of the major public sector projects, in par-ticular the huge Sines project 2/, do not seem well suited to Portugal'sresource endowments and comparative advantages. With a very high cost perjob created, these projects hold little hope of alleviating significantly theunemployment problem. The Government is conscious of these deficiencies andeager to improve the quality of investment decision making in the publicsector. Work in this respect is already underway, supported by the Bank, totrain staff members in the Ministries of Planning and Industry and in BFN andto develop the data needed for the computation of the internal economic rateof return and other such indicators of the economic viability of public sec-tor investment projects.

10. The Private Sector. Private firms continue to dominate aggregateoutput and to employ the bulk of the industrial labor force, particularlyin the small and medium size segments of the manufacturing sector. Thedominance of private firms is even greater in regard to the export of manu-factured goods (93%), the major exporting industries being food processing,textiles, clothing and footwear, wood and cork products, and electrical andnon-electrical machinery. These are the industries where Portugal has thebest possibilities for increasing exports and employment in the future.

1/ All percentages on the relative importance of the public sector are basedon 1973 figures for value added, gross fixed capital formation and employ-ment of firms now included in the public sector.

2/ The Sines industrial complex, to be built 150 kilometers south of Lisbon,will comprise a deep water port, an oil refinery, a petrochemical complex,a steel plant, a pyrite plant and other manufacturing plants. At thePortuguese Government's request, the Bank is providing assistance in re-evaluating the Sines complex.

ANNEX 1Page 5

However, despite this potential, investment in the private manufacturingsector is returning only slowly to its pre-revolution level. Time is neededto restore confidence, reestablish labor relations on a new basis, adjust tothe new factor prices and create new conditions of profitable operation forthe domestic and export markets. In addition, many private companies stillexperience liquidity problems or have lost part of their equity which makesit difficult for them to comply with the banking community's requirementsconcerning appropriate debt/equity ratios.

11. Government Policies. Through numerous pieces of legislation passedsince November 1975 the Government has already made a major effort to alleviatethe fears of private enterpreneurs and restore a more favorable investmentclimate. The Government's Program, in addition to setting broad orientationsfor Portugal's industrial policy, announced a calendar of legislative proposalsto be submitted to the Assembly which will give additional substance to theGovernment's stated commitment to restore confidence in the private sector.It can be reasonably expected that the announced measures, combined with aperiod of industrial tranquility, will stimulate a gradual recovery of privatemanufacturing investment and a resumption of industrial expansion.

12. Government Attitude Towards the Private Sector. The Government'sProgram explicitly recognizes the positive role to be played by the privatesector in the country's economic development. A law under discussion by theAssembly would exclude private enterprise activity only from public utilities,heavy industry, armaments and banking. Furthermore, the Government's Programclearly states that no further nationalizations are envisaged and guidelineshave been established for the compensation of the previous owners of national-ized enterprises. At the same time the resumption of foreign direct invest-ment is encouraged by the Foreign Investment Code published in April 1976which, except for a few provisions still to be clarified, offers generallyattractive conditions and adequate guarantees to foreign investors. TheGovernment has appointed a committee to establish the Foreign InvestmentInstitute which will be in charge of promoting, monitoring and orientingforeign direct investment in Portugal.

13. The February 1977 economic policy package includes further measuresto promote a revival of private initiative, in particular (a) acceleration ofcompensation procedures for foreign owners of assets nationalized since therevolution; (b) the possibility for the Portuguese holders of shares orsecurities of nationalized companies to make use of provisional compensationsto settle debts to the social security system, the State or the credit insti-tutions; (c) debt consolidation schemes combined with certain incentives foreconomically viable enterprises in financial difficulty if they commit them-selves to certain production, productivity, and financial targets; and (d) therevaluation of assets to increase equity and allow for larger depreciationallowances. Another measure under consideration is the possibility to usefuture compensation for nationalized assets as collateral for loans financingnew investments in priority sectors.

ANNEX IPage 6

14. Labor Relations. After a period marked by troubled relations betweenmanagement and labor and a decline in discipline and productivity, the labormovement appears to acknowledge the need for moderation in its demands and forincreases in production and productivity. The Government's Program clearlyexpresses the Government's commitment to create the conditions for a climateof productive labor and social peace, and includes a timetable for the sub-mission to the Assembly of a comprehensive program of labor legislation. TheGovernment has already submitted to the Assembly several legislative proposals,in particular new regulations concerning workers' dismissals (causes for dis-missal will now include unjustified refusal to obey orders, unjustified absent-eism, and acts of violence against property and persons), strike regulations,and delineation of workers' rights to control their enterprises. These legis-lative proposals are now being discussed by the Assembly. Their announcementhas already had a favorable impact in reducing absenteism and improving labordiscipline and labor relations in general.

15. Price and Wage Control. Following the revolution, price controlswere established covering strategic agricultural and industrial products, aswell as goods and services sold by companies with sales exceeding Esc 50 mil-lion ($1.7 million equivalent). By the end of 1975 price controls extended tosome 60% of the goods and services sold domestically. Combined with the sharpincrease in wages and in the prices of imported oil and raw materials, thesecontrols definitely contributed to the heavy losses experienced by public andprivate enterprises, and discouraged investment. However, with the exceptionof foodstuffs and a few products of special importance to the lower incomegroups, some liberalization in the use of price controls took place in 1976.The official target in approving price increases is to pass on increases incost and to allow a return on invested capital equivalent to interest ratesfor long-term loans plus a risk premium. On the wages side, the Governmenthas worked hard to achieve moderation in recent rounds of collective bargain-ing and has set a 15% ceiling (well below the 1976 rate of inflation) in itsguidelines for wage increases being negotiated for 1977. However, with unionmilitancy being the crucial factor in intersectoral wage disparities, it willtake some time before the Government can establish a coherent and equitableincomes and price policy. The recently created National Council of Incomesand Prices, bringing together representatives of the workers, the managers ofpublic and private enterprises and the Government agencies, will provide auseful forum for discussion but can hardly be expected to eliminate in theshort run the widespread distortions prevailing in the Portuguese pricesystem.

16. Incentives to Export. Since November 1975 the Government has sub-stantially reorganized and expanded its system of export incentives, described

Appendix A. The Government has also negotiated trade concessions for2 tuguese exports with the EEC and EFTA. In September 1976 a protocol was

rgned with the EEC which, among other things, increased the ceiling onselected Portuguese exports such as textiles and abolished customs duties onmany industrial imports into the EEC from Portugal. Furthermore, the 15%devaluation of the escudo in February 1977 (combined with the 24% de factodevaluation that took place between April 1974 and February 1977) is expected

ANNEX 1Page 7

to compensate to a great extent for the decline in the competitive positionof Portuguese industries resulting from the faster labor cost increases inPortugal than in Portugal's major trading partners.

17. Tariff Protection. Although officially justified by infant industryconsiderations, Portugal's tariff for industrial goods favored, before therevolution, the development of a number of inefficient subsectors such as theplethora of car assembly lines. Since the revolution, tariff protection wassubstantially reinforced. In May 1975, a surcharge of 20 to 30% was imposedcovering mainly intermediate goods and consumer goods. In October 1976, theimport surcharge was further increased to 30% on intermediate goods and a sur-charge of 60% was imposed on non-essential commodities. The Government alsointroduced an advance deposit requirement (50% of the value of imports to bedeposited for six months without interest) on some of the goods subject toimport surcharges. Together with the 15% devaluation of the escudo, the Gov-ernment imposed in February 1977 quota on imports of certain non-essentialproducts and increased the number of consumer goods subject to the 60% importsurcharge. Although these measures provide an immediate means of reducingPortugal's balance of payments deficit, the maintenance of a high level ofprotection further distorts the domestic price structure, encourages domesticproduction of non-essential products at high costs and discriminates againstexport activities. The Government views such protection as a temporarynecessity and expects to open the industrial sector to more competition asthe country prepares itself for admission into the EEC.

18. Support to Small and Medium Enterprises. Before the creation, fol-lowing the revolution, of the Institute for the Support of Small and MediumIndustrial Enterprises (IAPMEI) there was no Government agency to deal withthe specific problems of small and medium enterprises (pequenas e mediasempresas or PMEs) 1/, which still account for more than 60% of employmentin industry. The first task of IAPMEI has been to help PMEs survive theirliquidity crisis by facilitating through guarantees and other means theiraccess to bank credit. Now, with a professional staff of about 100 and sixregional offices in addition to its Lisbon headquarters, IAPMEI has begunto address the more fundamental restructuring needs of PMEs, made imperativeby the new economic environment. This is done through various forms offinancial and technical assistance, short however of direct lending (seeAppendix B).

19. Investment Incentives. Portugal developed in the early 1970's afairly sophisticated system of investment incentives. These incentives arestill in force, although they have been overshadowed since the revolutionby Portugal's uncertain political and social situation. With the return ofindustrial tranquility, they could play again a role in the sectoral andregional allocation of investment. The incentives aim at broadening Portugal'sindustrial base through the establishment of new industries, the strengtheningof Portugal's competitive position through technological innovation andproductivity gains, and the correction of imbalances in regional development.

1/ Enterprises currently eligible for IAPMEI's assistance include industrialenterprises with between 5 and 400 workers and annual sales not exceedingEsc 100 million ($3.3 million equivalent).

ANNEX 1Page 8

The fiscal incentives offered include tax holidays of three to ten years,exemption from customs duties on imported equipment and from capital gainstax, carry-over of losses, investment allowances and accelerated depreciation.Grants toward feasibility studies, interest subsidies and State guarantees mayalso be extended on a case-by-case basis. On the whole these investmentincentives are comparable to those offered in other semi-industrialized coun-tries. However, because they all tend to reduce the cost of capital, theymay involve a bias towards capital-intensive investments and therefore con-tribute inadequately to the solution of one of Portugal's most pressingproblems, unemployment. The Government is well aware of these interrelatedproblems of unemployment, choice of technology and cost of capital. The Gov-ernment has expressed its intention to emphasize more in the future, subjectto their long-term economic viability, those investments in the industrialsector that have the maximum direct and indirect employment impact. Moreemphasis will also be put on export-oriented and import-substituting projects.These new orientations will be articulated in the Medium-Term Plan and couldpossibly include changes in the system of investment incentives.

C. The Financial Environment

20. Besides BFN, Portugal's financial sector consisted at the end of 1976of the Banco de Portugal (Portugal's Central Bank), 19 commercial banks, theCaixa Geral de Depositos (CGD, Portugal's largest savings bank) and 19 othersavings banks, the Sociedade Financiera Portuguesa (a specialized financialinstitution), insurance companies, a few parabanking institutions, and theLisbon Stock Exchange. A description of these institutions is to be found inAppendix C.

21. During the two years following the revolution, the financial sectorunderwent profound changes affecting the size and pattern of flows of funds aswell as the institutional structure of the sector. The sharp drop in privatesavings combined with the huge financing needs of the Government and thedeteriorating financial position of many firms in both the public and privatesectors put considerable pressure on financial intermediaries and obliged theCentral Bank to finance a large proportion of credit through rediscountingoperations and money creation. Credits extended by the financial community tothe public and private productive sector increased from Esc 249.5 billion($8.3 billion equivalent) at the end of 1973 (of which only Esc 13.9 billion[$0.5 billion equivalent] was granted by or rediscounted with the Central Bank)to Esc 347.7 billion ($11.6 billion equivalent) at June 30, 1976 (of which Esc94.8 billion [$3.2 billion equivalent] was granted by or rediscounted with theCentral Bank). Whereas such an expansionary policy was justified by the needto avoid a more severe recession, it is now recognized that further credit ex-pansion must be much more selective, directing resources towards economicallyviable enterprises capable of alleviating the unemployment and balance ofpayments problems.

22. The institutional structure of the financial sector was affected bythe nationalization in March 1975 of all commercial banks and insurance com-panies, with the exception of those owned by foreign interests, which brought

ANNEX 1Page 9

most financial institutions under Government control. The Government set upin 1975 a Commission for the Restructuring of the Banking Sector. The Commis-sion, which has not yet submitted its report, is expected to make recommenda-tions concerning a possible reduction in the number of commercial banks, waysto improve the distribution of commercial bank branches throughout the countryand the desirability of creating specialized credit institutions for agricul-ture and housing. The institutional structure for investment credit toindustry is not expected to be affected by the conclusions of the Commission.

23. Lending Activities. Table 1 of Appendix C shows the distribution ofmedium- and long-term lending activities between commercial banks, CGD, othersavings banks and BFN. It shows that while BFN accounted at the end of 1975for 23.1% of total outstanding medium- and long-term credit to enterprises andindividuals, CGD accounted for 56.7%, the other savings banks for 7.3% and thecommercial banks for 12.9%. While commercial bank credit is spread betweenall sectors (including trade), and is mostly with terms not exceeding twoyears, the other financial institutions tend to be more specialized and tolend for longer terms. Savings banks other than CGD play only a minor roleoutside of consumer credit and the financing of housing and construction.CGD is dominant in financing government agencies, housing, transport, tele-communications, agriculture and fisheries. For industry as a whole 1/ CGD'sterm financing exceeds that of BFN's, while for manufacturing industry only,BFN is the more important source of term financing. As of the end of 1975,BFN held approximately $580 million equivalent of term loans to industry, or39% of the total financing for that sector (versus $620 million equivalent or42% for CGD). In manufacturing only, BFN held about $460 million equivalentor 49% of the total (versus $350 million equivalent or 36% for CGD).

24. In its lending to manufacturing industries CGD has a reputation ofprocessing credit applications slowly and of being highly security-conscious(an attitude also shared by commercial banks) while BFN's appraisal procedures,though still needing improvement, are both more rapid and more thorough. Al-though the adequacy of the securities offered is not overlooked, BFN puts moreemphasis on the merits of the projects being financed. For this reason BFNappears to be the best financial institution through which to channel assist-ance to the Portuguese industrial sector.

25. Domestic Resource Mobilization. Since the revolution time depositshave become the only financial instrument through which the Portuguese finan-cial sector has been able to mobilize domestic savings. No new issue of pri-vate securities has taken place since the closing immediately after the revolu-tion of the Lisbon and Oporto Stock Exchanges. The only issues of bonds havebeen those of the Government, which have been floated at attractive terms withwhich financial institutions like BFN could not compete given the ceilings onon-lending rates. The Lisbon Stock Exchange was reopened for bonds in January1976 though trading has remained very limited so far. In February 1977, the

1/ In addition to manufacturing, the industrial sector includes extractiveindustries and public works.

ANNEX 1Page 10

Government reopened the market for shares, though with new regulations. Con-sideration is also being given to introducing new types of financial instru-ments, like certificates of deposits which could only be issued by BFN and CGD.

26. While in mobilizing time deposits commercial banks are limited by

law to accepting deposits with terms not exceeding one year, more than 85%of time deposits accepted by BFN, CGD and the other savings banks are withterms exceeding one year. At June 30, 1976, BFN had time deposits estimatedat Esc 9.7 billion ($0.3 billion equivalent) compared to Esc 38.5 billion($1.3 billion equivalent) for CGD and Esc 9.5 billion ($0.3 billion equiva-lent) for other savings banks. CGD's dominant position is due to its roleas banker for Government agencies, to its image of stability created by a100-year history, to its extensive branch network in Portugal and to itsconnections abroad to attract workers' remittances. This also explains whysavings continued to flow into CGD in 1975 whereas BFN and commercial bankswere faced with stagnation or actual decreases in their time deposits andforced to resort to Central Bank rediscounts to finance the expansion of theirlending. The savings flow into CGD was at such a rate that it not only sus-tained the increase in CGD's lending but it also led to the accumulation ofsubstantial liquid funds, estimated at Esc 8.9 billion ($0.3 billion equiva-lent) at the end of June 1976. As CGD's present pipeline of loan applicationsmakes it unlikely that these liquid funds could be lent for investment purposesin the short term, some arrangement would be desirable whereby CGD could putpart of its excess resources at the disposal of BFN. Possibilities includeeither direct loans to BFN (for instance in the form of certificates ofdeposit issued by BFN), the co-financing of important industrial projectsappraised by BFN, or the sale by BFN to CGD of the shorter maturities of someof its loans. 1/

This last possibility could be particularly attractive to CGD as itwould amount to lending medium-term funds at the higher interestrates allowed for longer term loans.

Source: EMENA/IDF

April 1977

PORTUGAL'1 /

Manufacturing - Output Rates of Growth, 1968-75(Constant 1970 prices, in percent)

1968-73 1974 1975

Food, beverages and tobacco 6.6 13.1 27.0

Textiles, clothing and footwear 11.6 5.8 -17.2

Wood, cork and furniture 4.8 -1.0 - 6.9

Paper, printing and publishing 6.5 29.3 0.5

Chemicals and related activities 10.2 0 5.6

No*-metal mineral products 10.5 2.8 1.9

Basic metal industries 11.9 -13.1 -18.2

Metal products, mechanical and electricalequipment, and transport equipment 12.6 -1.0 -12.9

Miscellaneous manufacturing industries 2.2 -16.8 21.3

Total manufacturing 9.9 2.1 -4.9

1/ According to preliminary estimates the increase of manufacturing output in 1976 was 5.6%.

Source: National Institute of Statistics and Central Planning Secretariat.February 1977

ANNEX 1Table 2

PORTUGALDistribution of Gross Value Addedby Manufacturing Sub-Sectors in 1973

Gross Value AddedEsc. million %

Food, beverages and tobacco 9,299 10.3

Textiles, clothing and footwear 19,596 21.8

Wood, cork and furniture 6,295 7.0

Paper, printing and publishing 3,673 4.1

Chemicals and related activities 10,664 11.8

Non-metal mineral products 6,919 7.7

Basic metal industries 3,678 4.1

Metal products, mechanical and electricalequipment, and transport equipment 25,283 28.1

Miscellaneous manufacturing industries 4,582 5.1

Total manufacturing 89,989 100.0

Source: Central Planning SecretariatFehruary 1977

ANNEX 1Appendix APage 1

PORTUGAL

Incentives for Exports

Since November 1975 the Government has substantially reorganizedand expanded its system of export incentives, which now include the following:

1. Financial Facilities

Preferential interest rates apply to export credit (see Annex 3).A Council for the Financing of External Trade has been created within theCentral Bank aimed, among others, at coordinating the activities of thevarious credit institutions and of COSEC (see paragraph 2 below) in supportof exports. Furthermore, the system of export financing has been reorganized,introducing such new features as direct financing of foreign importers andfinancing of market research, export promotion programs and establishmentof commercial networks and warehouses abroad. Also, in an effort to makePortuguese enterprises competitive in supplying less developed countries withheavy equipment, a special financing arrangement has been established for thistype of export and the associated feasibility studies.

2. Credit Insurance for Exports

The system of credit insurance for exports was strengthened by alaw in April 1976 which endowed the state-owned Credit Insurance Company(COSEC) with a new autonomous status and introduced a broader and clearerclassification of credit insurance policies. Most important for exports isthe introduction of insurance policies for direct credit by Portuguese banksto foreign importers, and the broadening of insurance policies to cover risksassociated with market research, export promotion programs and establishingcommercial networks and warehouses abroad. Insurance policies have also beenintroduced covering exchange risks and abnormal and unforeseeable increasesin production costs owing to modifications in economic conditions affectingthe execution of export contracts. Finally, COSEC has strengthened its tieswith major international reinsurance companies, and obtained admission, withobserver status, in the International Union of Credit and Investment Insurers(Berne Union).

3. Export Promotion Fund

The Export Promotion Fund is being reorganized to make it moreresponsive to exporters' needs. The Fund maintains 30 delegations in for-eign countries and various sectoral working groups in Portugal providing

ANNEX 1Appendix APage 2

technical and commercial assistance to exporters. The Fund undertakes andpublishes both general country studies on foreign markets and specific studieson the prospects for particular Portuguese products abroad. In addition tothe traditional Western European and U.S. markets, special efforts are beingmade to help Portuguese exporters enter new markets in the Middle East, LatinAmerica and Eastern Europe. The Fund is also in charge of stimulating theconclusion of export development contracts and of controlling their imple-mentation.

4. Export Development Contracts

Special incentives may be granted to firms or groups of firms con-cluding export development contracts with the Export Promotion Fund underwhich they undertake to implement projects of investment, reorganization orrestructuring (including association or mergers of small and medium enter-prises and joint ventures with foreign partners) in an effort to increasenon-traditional exports or develop new markets. The incentives include:

(a) technical and commercial assistance from the Fund;

(b) support in obtaining bank credit at the reduced rateapplying to rediscountable export credit;

(c) support in obtaining credit insurance from COSEC atreduced premium rates (with the Fund compensatingCOSEC for the difference from the normal premium rates);

(d) interest subsidies and participation by the Fund in R&D,marketing and promotion expenditures;

(e) exemption from or reduction of direct taxes on profitsfrom exports made under the development contract;

(f) deduction from the amount assessable under the IndustrialContribution (the basic profits tax) of the value of theinvestment goods raising the technological level of thesector of activity to which they belong; and

(g) accelerated depreciation of equipment and other fixedassets used to produce the goods and services coveredby the development contract.

Drawback Facilities

The scope of the drawback facilities for imported inputs used inthe manufacture of exports was broadened in April 1976 to include not onlyraw materials but also all types of intermediate goods. The granting ofthe drawback remains, however, conditional on a statement by the Ministryof Industry that equivalent goods cannot be procured in Portugal.

ANNEX IAppendix APage 3

6. Foreign Investment in Export Oriented Activities

The Foreign Investment Code, approved in April 1976, sets higherceilings (20% of invested capital instead of 12%) for profit remittances byforeign-owned companies when they export more than 50% of their production.

Source: EMENA/IDFApril 1977

ANNEX 1Appendix BPage 1

PORTUGAL

Forms of Assistance Extended by the Institute for theSupport of Small and Medium Industrial Enterprises (IAPMEI)

To qualify for assistance from IAPMEI, industrial PMEs 1/ mustemploy between 5 and 400 persons and have annual sales not exceeding Esc 100million ($3.3 million equivalent). However, IAPMEI's assistance may beextended to groupings of enterprises or enterprises which, following a re-structuring approved by IAPMEI, exceed the 400 employees or Esc 100 millionsales limits. Out of the about 15,000 industrial enterprises thought to meetthe above conditions, 8,000 have already applied for some form of support fromIAPMEI. The following forms of assistance can be extended by IAPMEI to quali-fying PMEs:

1. Financial Assistance

IAPMEI is not itself a credit institution but it facilitates PME'saccess to credit through the following facilities:

(a) Guarantees for short-term loans which pre-finance confirmedorders or finance the purchase of raw materials. The maximumguarantee in each case is Esc 3.0 million ($100,000 equivalent)or 50% of the risk, whichever is less. By June 30, 1976,IAPMEI had guaranteed 372 loans for Esc 222 million ($7.4million equivalent) under this facility. Repayment had al-ready started on 175 of these loans, with 36 being affectedby arrears.

(b) Guarantees for medium- and long-term loans which finance fixedand working capital investment or expenditures incurred inrestructuring operations. The maximum guarantee in each caseis Esc 10 million ($333,000 equivalent), 2/ except in cases ofmergers, joint ventures or projects located on industrialestates where the ceiling can be raised. By June 30, 1976,IAPMEI had guaranteed 218 loans for Esc 253 million ($8.4million equivalent) under this facility. 3/

1/ Different qualifications apply to other types of PMEs.

2/ The Esc 10 million ceiling includes also guarantees for short-term loans.

3/ In 1975 91 loan applications were submitted to BFN through IAPMEI. BFNapproved 46 loans partially guaranteed by IAPMEI and 26 others with noguarantee.

ANNEX IAppendix BPage 2

(c) Interest rate subsidies. On a case-by-case basis IAPMEImay grant interest subsidies of up to 3% for a maximumperiod of three years for investment loans contributingto specifically approved objectives (employment, regionaldevelopment, groupings of enterprises and other initia-tives supported by IAPMEI).

(d) Support in obtaining from credit institutions the dis-counting of commercial paper and particularly of debt owedby the State, local authorities and pubic enterprises.

(e) Support in obtaining a rescheduling of debt, particularlywhen short-term debt had been contracted to finance fixedassets (a widespread practice for PMEs before the revolu-tion).

2. Technical Assistance

When approached by a PME with problems, IAPMEI is prepared tocarry out a short study of the major difficulties. Eight thousand suchstudies had been made by June 30, 1976. IAPMEI is also prepared to followup with technical, financial and managerial advice. In addition, a listof potential managers has been assembled which can be made available toPMEs looking for new managers. A comprehensive program of training activi-ties is also being set up, including training of PMEs' workers in theunderstanding of basic concepts of business economics.

3. Promotion of Industrial Investment

IAPMEI has funds to assist in the financing of R & D expendituresand feasibility studies for individual enterprises or groupings of enter-prises. A special effort is made to promote export-oriented or import-substituting activities. Fourteen projects have been studied so farincluding projects in the wood, metal products, and textile industries.

4. Mergers and Other Forms of Collaboration

IAPMEI performs a brokerage function in encouraging firms to mergeor establish other forms of collaboration. By October 1976 IAPMEI had contri-buted to 40 mergers or collaboration agreements and 17 more were being prepared.


ANNEX 1Appendix CPage 1

PORTUGAL

Portugal's Financial Institutions(Other than BFN)

1. Banco de Portugal

Banco de Portugal is Portugal's Central Bank. In addition toits responsibilities in the control of the money supply, it has the usualregulatory powers over credit institutions and establishes maximum interestrates as well as reserve requirements. It offers rediscount facilities tocredit institutions and uses a system of preferential rates to orient credittowards priority sectors.

2. Commercial Banks

There were at the end of 1976 16 commercial banks with their headoffices in Portugal and three foreign-owned banks. The former were allnationalized following the revolution and endowed with a new status leavingthem with an appreciable degree of financial and administrative autonomy.Their number is expected to be reduced in the course of 1977 as a result ofseveral mergers. Commercial banks traditionally have been and remain basic-ally a source of short-term credit for the productive sectors, mainly throughdiscounting of bills, although this credit is usually renewed more or less asneeded. Since 1969 the commercial banks have been allowed to grant somemedium-term credits but have used only a small fraction of their resources forthat purpose. Outstanding credit at the end of 1975 totalled Esc 170 billion($5.7 billion equivalent) out of which only 7.2% was for a term exceeding oneyear. As shown in Table 1 attached, this latter amount was spread between allsectors (including trade). It was also mostly with terms not exceeding twoyears. In extending medium-term loans, commercial banks are traditionallymore concerned with the securities offered than with the merits of the proj-ects being financed. Their sources of funds are essentially sight and timedeposits (see Table 2 attached). Since December 1975 commercial banks arelimited by law to receive deposits with terms not exceeding one year.

3. Caixa Geral de Depositos

Established in 1876 as a public savings institution, Caixa Geralde Depositos (CGD) is by far Portugal's largest savings bank (see Tables 1aid 2 attached). Credit outstanding at the end of 1975 totalled Esc 73.4b'llion ($2.4 billion equivalent) out of which 74% was for more than oneyear and 54% for more than seven years. In its lending, CGD has a leadingrole in financing government agencies, housing, public utilities, transport,telecommunications, agriculture and fisheries, while its lending to manu-facturing is less than that of BFN. CGD has the reputation of operating


conservatively and slowly and putting much emphasis on the adequacy of theavailable security. Its project appraisal capability is limited though itsmanagement hopes to strengthen it in the future.

4. Other Savings Banks

Beside CGD there were at the end of 1976 19 savings banks active inPortugal. Credit extended by these banks totalled Esc 9.8 billion ($326 mil-lion equivalent) at the end of 1975, out of which 72% was for more than oneyear and 37% for more than seven years. These banks are particularly active-in consumer credit and housing. They are not a significant source of indus-trial financing. Although they were not nationalized, they will be subject tospecial legislation, still to be enacted. Their sources of funds are essen-tially time deposits with terms exceeding one year.

5. Sociedade Financiera Portuguesa

The Sociedade Financiera Portuguesa (SFP) was formed in 1969 as asemi-public institution, apparently to carry out development banking functionsnot being undertaken by BFN or other institutions. Its main activity beforethe revolution revolved around raising foreign capital. Its single largestinvestment out of a total loan portfolio of Esc 6.6 billion ($220 millionequivalent) was a loan in 1972 of Esc 3.1 billion ($100 million equivalent)to the Government of Mozambique for the Cabora Bassa hydroelectric projectin that country. Following SFP's nationalization and the independence agree-ment with Mozambique, this loan has now been converted into equity held bySFP.

6. Insurance Companies

All insurance companies with the exception of those with a signifi-cant foreign equity participation were nationalized in March 1975. However,few changes are reported in their operational policies. A new public insti-tution, the National Institute of Insurance, has been created to coordinatethe development of insurance and reinsurance activities. Traditionallyinsurance companies have not played a significant role in financing indus-trial investment. Most of their reserves are invested in public debt bonds.Equity participation held in their portfolio are to be transferred to theInstitute of State Participations against compensation still to be determined.

7. Parabanking Institutions

Parabanking institutions in Portugal include a few mutual fundsholding shares in metropolitan and overseas companies, factoring institutionsand instalment sale financing companies. They were all nationalized in March1975. None are a significant source of industrial finance.


8. Market for Shares and for Bonds

Before the revolution a growing, although still narrow and specula-tive, market for new issues of shares and bonds provided an additional sourceof long-term capital for the private sector. The market for shares and bondswas organized by the stock exchange of Lisbon and Oporto, the latter beingmuch smaller and less active. Both exchanges were closed immediately afterthe revolution due to the excessive speculative activity in shares that hadtaken place in the previous months. Since then there has been practically nonew issue of private securities. However, the Government has continued toborrow heavily. Given the political situation, public debt issues in 1974and 1975 had to be almost entirely subscribed to by the banking system, butin 1976 the Government was moderately successful in a bond issue aimed atthe general public and offering progressive interest rates of 10 to 15% com-bined with a partial indexation to gold. Also, the Lisbon stock exchange wasreopened for bonds in January 1976 though trading has remained very limitedso far. In February 1977 the Government reopened the market for shares thoughwith new regulations.


PORTUGAL

Credit Extended by Credit Institutions with Termsof More than One Year 1/

(Balance outstanding at the end of the year in Esc million)

Caixa Geral de

Commercial Banks Depositos Other Savings Banks BFN

Sectoral Breakdown 1973 1974 1975 1973 1974 1975 1973 1974 1975 1973 1974 1975

1. Government agencies 137 181 533 3,209 4,581 6,368 1,535 1,656 635

1.1. Public services 120 125 491 941 1,585 3,197 810 748 5811.2. Economic coordination entities 17 17 11 102 88 227 81 78 541.3. Local authorities 39 31 2,166 2,848 2,944 646 830

2. Productive Sector 16,823 17,775 11,836 32,578 40,085 48,116 4,666 6,398 7,044 14,255 19,949 21,510

2.1. Consum r credit Z,615 1,994 1,481 79 61 65 1,7.61 2,440 2,5512.2. Import credit 333 200 1472.3 Export credit 85 29 27 12 952.4 Production and investment 3/

credit 13,789 15,552- 10,181 32,201 39,682 47,105 2,904 3,905 4,314 14,255 19,94Y 21,5 VYa) Agriculture, forestry

and livestock 324 329 333 1,031 1,158 1,315 136 168 166 333 385 85b) Fisberies 68 83 68 1,063 1,129 1,272 3c) Extractive industries 430 158 70 649 647 649 23 35 34 130 130 123d) Manufacturing induatries 5,864 7,216 4,110 5,843 8,120 10,364 97 151 158 9,407 14,236 17,332 2/e) Construction and public )

works 1,514 1,232 1,012 389 517 440 1,415 3,027 2,409 )f) Electricity, gas, water )

and sewerage 288 309 267 4,401 4,857 5,949g) Trade 2,332 2,143 1,569 51 77 104 )h) Transports, warehouses )

and telecommunications 740 657 516 6,829 7,289 7,337 1 1 16 )i) Other activities 2,479 2,725 2,236 11,996 15,983 19,779 1,181 1,446 1,424 ) 4,385 5,198 3,970

2.5 Credit to other credit 179institutions 1 19298 328 851 1

TOTAL 16,961 12,370 12,370 35,769 44,666 54,48 4,666 6,398 7,044 15,790 21,605 22,145

1/ Excluding securities pUrLfUlio 1

2/Credit to manufacturing industries only was eatimated at 13,852 x3/ Includes credit for exports of investment goois a 1

Source: Banco de PortuealJanuary 1977

PORTuGAL

Deposits in Credit Institutions

(Balance in Escudos million at the end of the year)

Caixa Geral Other SavingsConmercial Banks de De ositos Banks a_ BFN

1973 1974 1975 1973 1974 1975 1973 1974 1975 1973 1974 1975

Sight deposits 120,052 101,412 88,366 27,545 32,726 43,126 4,124 4,121 4,177 - - 55

Time deposits 114,164 128,034 119,037 19,894 27,584 32,080 6,039 8,122 8,993 7,645 9,065 9,151

of which- less than 30 days 3,115 2,301 1,497 9 2 6 - - -

- 30- 90 days 2,085 2,689 2,042 48 160 160 8 7 4 - - _

- 91 - 180 days 1,900 1,787) 98,524 7 4) 2,819 104 43 ) 825 - - -

- 180 days - one year 104,675 117,690) 1,409 1,959) 755 913 ) - - 112

- over one year 2,389 3,567 16,974 18,430 25,461 29,101 5,163 9,159 8,158 7,645 9,065 9,039

Total 234,216 229,446 207,203 47,439 60,310 75,206 0,163 12,243 13,170 7,645 9,065 9,094

EMENA IC&DFCJanuary 1977

MPiln

Anne-x 2

PORTUGAL

Maximum Interest Rates

(in per cent)

December December July December December July March

1972 1973 1974 1974 1975 1976 1977Date established_

Banco de Portugal

Discount ...... ,,,,......... 4.0 5.0 6.5 7.5 6.5 6.5 8.0

Rediscount .2.0-4.0 3.0-5.0 4.0-6.5 4.5-7.5 3.0-6.5 3.0-6.5 8.0-12.0

Other credit operations 6.5-7.5 6.5-7.5 9.5-12.0

Commercial Banks

Deposit rates 1/ 1/ 1/ 1/

Sight deposits .......................... 1.0 0.5 no. int. 1.0 1.0 1.0 1.0

Other deposits - notice or time depositsof up to: 1/

15 days . ............. 1.0 0.5 no. int. 1.0 - - -15-30 days ........ , . .... 2.25 2.5 2.5 3.5 - - -30-90 days ......... ,,,,,.,,..... 3.25 3.5 3.5 4.5 4.5 4.5 5.090-180 days . ...................... 4.25 4.5 5,5 6.5 6.5 6.5 7.5180-270 days . .. ........... ) 5.5 7.0 8.0270 days-l year . ..... I ... )5.25 6.0 8.0 9.0 )9.5 )9.5 )11.0

Investment and savings Banks

Deposit rates 2/ 3/ 4/ 5/ 5/ 5| 5/

Sight deposits ................,,,.,.... 3.0 3.0 3.0 4.0 4.0 4.0 4.0

Other deposits - notice or time depositsof up to: 2/ 3/ 4/ 5/

15 days . .3.0 3.0 3.03 4.0 -- -

15-30 days . ........... 2.25 2.5 2.5 3.5 - - -30-90 days ........ ............... . 3.25 3.5 3.5 4.5 4.5 4.5 5.090-180 days .............. ,., . 4.25 4.5 5.5 6.5 6.5 6.5 7.5180-270 days . ........... 5.5 7.0 8.0270 days - 1 year .)5.25 6.0 8.0 9.0 )9.5 )9.5 )11.0over 1 year . .................... 5.75 6.5 8.5 9.5 10.5 10.5 12.0over 2 years . ................ 6.75 7.5 9.5 9.5-10.5 10.5-11.5 10.5-11.5 12.0-13.0

All credit institutions

Lending rates

Discount and loans up to:

3 months . ............. ) ) ) 7.75 8.75 10.253-4 months .......... .. ............ )6.75 )7.754-6 months ........... ,,...... )5.75 )5.75 7.25 8.25 )8.25 )9.25 )10.756-12 months .. .. ...... 6.5 6.75 8.25 9.25 9.5 10.50 12.001-2 years ....... ,.,,,,......... 7.25 7.75 9.50 10.50 10.75 11.25 12.752-3 years .7.50 8.25 10.00 11.003-5 years .7.75 8.50 10.50 11.50 )11.75 )12.25 )13.755-7 years ....... 8.00 8.75 11.00 12.00 12.25 12.75 14.25Over 7 years . . ..... 8.25 9.00 11.50 12.50 12.75 13.25 14.75

1/ - Only for deposits by individuals.

2/ - Only for deposits by individuals up to Esc. 50,000, otherwise 1.5 per cent. For deposits by companies 1 per cent.

3/ - Oniy for deposits by individuals up to Esc. 50,000, otherwise 1 per cent. For deposits by companies 0.5 per cent..

4/ - Only for deposits by individuals up to Eac. 50,000, otherwise 1 per cent.

5/ -Only for deposits by individuals up to Esc. 70,000, otherwise 2.0 per cent.

6/ - Savings deposits.

Source: Banco de Portugal

March 1977

PORTUGAL

Structure of Lending Rates Established by Banco de Portugal(effective since March 1, 1977)

(in percentage)

Received bythe Credit Institution Maximum Rate to be charged by Credit Inatitutionfrom Banco de Portugal 1/ Up to 90 From 90 to From 180 From 1 year From 2 to From 5 to Over

days 180 das to lyear to 2 years 5 years to 7 years 7 years

1. Ordinary operations 10.25 10.75 12.0 12.75 13.75 14.25 14.75

2. Seasonal credit foragriculture, forestry,livestock and fisheries 3.0 7.25 7.75 9.0 9.75 - - -

3. Export credit 3.0 7.25 7.75 9.0 9.75 10,75 11.25 11.75

4. Investment credit for 1st yr.) 5.0 - - - 7.75 8.75 9.25 9.75agriculture, forestry, 2nd yr.) 5.0 - - - 7.75 8.75 9.25 9.75livestock, fisheries, 3rd yr.) 4.0 - - - 9.75 10.25 10.75mining and manufac- 4th yr.) 3.0 - - 10.75 11.25 11.75turing industries, and )tourism 2/ Remaining yrs. ) - - - - - 13.75 14,25 14.75

5. Credit for the restruc-lst yr. 5.0 - - - 7.75 8.75 9.25 9.75turing of economically)viable enterprises in )Remain-financial difficulty )ing yrs. - - - - 12.75 13.75 14.25 14.75

6. Consumer credit

a) durable consumergoods 3/ 12.25 12.75 14.0 14.75 15.75 16.25 16.75

b) other consumer goods 4/ - 10.75 11.25 12.5 13.25 14.25 14.75 15.25

1/ This amount is designed to insure that the credit institution receives an interest rate equivalent to thatfor ordinary operations. This amount is received irrespective of whether or not the credit operation isrediscounted with Banco de Portugal.

2/ The granting of the interest reduction is contingent on certain criteria of financial and economic viability.Furthermore,the amount of the reduction is reduced if the investment cost per lob cgeated, or maintained inconditions of .mproved productivity,exceeds Esc 600,000 (US $15,500 equivalent at the current rate).

3/ Interest rates for durable consumer goods include a 2% surcharge to be paid to the Exchange Risk Guarantee Fund.4/ Interest rates for other consumer goods include a 0.5% surcharge to be paid to the Exchange Risk Guarantee Fund.

Source: Banco de PortugalApril 1977.

EMENA/IDFApril 1977

ANNEX 4


Expected Real Interest Cost of Subloans

The likely real cost of foreign exchange loans to BFN's borrowersdepends (a) on future inflation rates and (b) on any future devaluations ofthe escudo and the extent to which the corresponding cost is assumed by theborrower.

(a) The table presented below deals with the inflation aspectand presents the real cost under optimistic and pessimistic assumptionsof inflation (assuming year 1 is 1977; if year 1 is later, the optimisticassumption becomes more pessimistic). The loan is assumed to be totallydisbursed at the beginning of year 1 and to be repaid in five equal annualpayments of principal and interest, starting at the end of year 2. Interestis paid during the grace period. The interest rate is assumed to remain at14.25%. throughout the life of the loan.

Assumed InflationYear Optimistic Pessimistic

(% change per year)

1 15 222 10 153 7.5 104 7.5 105 7.5 106 7.5 10

Real Cost (% p.a.) 3.6 -0.5

(b) To include the effect of possible devaluations of theescudo, a devaluation is assumed to occur in Year 1, in additionto the assumptions above. The borrower is assumed to bear the cost of theequivalent of a 3% devaluation, any additional cost being assumed by theexchange risk guarantee fund. This has the effect of increasing the principaloutstanding (before the first repayment at the end of year 2) by 3%, and leadsto an increase in actual interest payments. In addition, a premium of 0.75%p.a. for the partial risk coverage is assumed to be paid over the life ofthe loan. Using the pessimistic inflation assumption, the real cost of theloan to the borrower under these conditions would be 1.1% p.a..



Board of Management and Commission of Control(as of September 30, 1976)

Position Incumbent Appointed by Field

I. Board of Management

President Dr. Joao Mauricio Fernandes Salgueiro Government Economics

Member Dr. Noel Carlos de Melo Loureiro Government Finance

Member Dr. Abel Machado de Oliveira Government Finance

Member Dr. Almeida Serra Government Economics

Member Eng. Antonio da Silva Teixeira Government Mining Engineering

II. Commission of Control

Chairman Dr. Artur Luis Alves Conde Government Economist

Deputy Chairman Dr. Gabriel Jose dos Santos Fernandes Government Auditor

Member (vacant) Workers' Commi-

ssion

Source: Banco de Fomento NacionalNovember 1976

BANCO DE FOMENTO NACIONALResponsibilities of Board of Managment

(September 30,1976)

DR.JOAO SALGUElIRO l

| PRESIDENT l

DR. IIOI:L LOUREIRO Dl ACAD DE OLIVEIRA D IR.Al MEIDA SEARA 71 ENSIV TEIXEIRA l

- DIRECT INVESTMENT _- BRANCH OFFICE ECONOMIC STUDIES ADMINISTRATIVE MATTERSCREDIT COORDINATION

-CREDIT FOR PRODUCTION -CREDIT rOR EXPORT SPECIAL OPERATIONS ?EFiSONNEL MATTERSAND SAtE IN PORTUGAL SALES

LEGAL MATTERS FINANCIAL MATTERS -RELATIONS WITH THE ORGANIZATION AND(INCLUDING FOREIGN BANK OF PORTUGAL DATA PROCESSINGLINES OF CREDIT) AND IAPMEI SERVICESF DISBURSEMENT AND - MATTERS CONCERNING -IB. F. N.'s) REORGANIZATION

FOLLOW-UP OF OPERATION THE FORMER OVERSEASTERRITORIES

-RELATIONS WITH THE

WORKERS COMMISSION

AND UNIONS

World Bank -16721

C'

BANCO DE FOMENTO NACIONAL.ORGANIZATION CHART(SEPTEMBER 30, 1976) ANNEX 7

D,. C-- Di-, E- A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-L3 SaDiOaall&3l n OnSOa6ICrnSiOera.oo O. nnld Urio -0,acrr inUlS,ka r.Va.IaP-to- *,raSa Sans -3 SIO.0

P-U S-19 P.6 6- 1 P-3 S.. P-1 5-4~~~~~~~~~~~~~~~~~ S SD 90 .1p', -2

P.2 S.u P-~~~~~92 SzSS P.1 I 2

Lg,ealtra ari Crarriair Preirl Wek,ee Cadur orPrOdoe,oe rmtreal Cea.eeedee. ~e1 F,ler PlaonirgdeC L, I' -F-d~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~hS,aeartadLhmrolaCiariCliorSeoiStnn iaaOr

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Leorrat 24

LigrarSTaiflltor 2

S-, SI.,, Is,alS 522

Wo .. ,ae -6720

ANNEX 8


summary of Operations 1971-76(amounts in million escudos)

Includes Overseas Territories Portugal Only

1971 1972 1973 1974 1974 1975 1976

Applications

Loans- number 572 635 750 1,283 1,-062 Si-811 05

amount 6,912 9,636 15,773 18,730 16,261 23,383 19,699

Equity: number 4 1/ 7 10 4 3 1 7amount 49 79 255 90 78 15 368

Bonds: number 5 1/ 3 4 - - - -amount 58 40 36 - - - -

Guarantees:number 7 18 25 33 21 18 29amount 193 1,098 1,770 1,274 474 1,446 1,221

Totals: number 588 663 789 1,320 1,086 830 836amount 7,212 10,853 17,834 20,094 16,813 24,844 21,288

Approvals

Loans: number 282 337 410 517 436 466 401amount 5,147 7,009 10,705 10,990 10,072 10,761 18,800

Equity: number 4 1/ 7 10 4 3 1 7amount 49 79 255 90 78 15 368

Bonds: number 5 1/ 3 4 - - - -amount 58 40 36 - - - _

Guarantees:number 7 18 27 28 16 14 22amount 98 1,129 1,813 1,523 803 376 947

Totals: number 298 365 451 549 455 481 430amount 5,352 8,257 12,809 12,603 10,953 11,152 20,115

Disbursements

Loans: amount 3,013 4,566 4,462 7,359 5,950 7,101 7,950

Equity: amount 115 72 192 90 78 10 368

Bonds: amount 25 53 32 - - -

Totals: amount 3,153 4,691 4,686 7,449 6,028 7,111 8,318

1/ division between equity and bonds approximate

Source: Banco de Fomento NacionalMarch 1977

ASNEK 9

BANC0 DE PiMENTO 01ACI0NAL

Analysis of Ap.Orovod Loon. 1971-76

1 9 71 1 9 72 1897 3 1897 4 1 9 75 1 97 6soani No. Amanat Z No. haunt t No. Amount t No. Amount 1 Me. Amount I oe. flu.entt 7N..,A- % N.. A-t m

tran.t Cr.440

tadoatrisl Cr-dit:

Foed,toff and b--Sragn 14 149.6 3.7 26 133.5 2.9 29 329.4 4.2 29 338.6 3.4 30 439.6 4.1 36 141.0 3.8T-itll.., pparal an f_otm_ 31 197.2 4.8 28 112.8 2.4 21 155.2 2.0 42 253.4 2.5 28 1862 1.7 13 84.7 0.5Tibr., cork and fe-nitoro 18 60.8 1.3 26 59.7 1.3 25 156.3 2.0 24 114.0 1.1 34 150.6 1.4 22 107.0 0.6Po1p. papor ad pntinoin 13 137.6 3.4 6 28.2 0.6 10 27.3 0.3 20 107.4 1.1 14. 284.7 2.6 6 19.9 3.1Rubber, ohaicala ad patrolou 0 587.1 1.4.4 3 105.0 2.2 7 33.0 0.4 11 1,427.9 14.2 8 30.5 0.7 14 619.6 3.3Nn--etaIllt ni-rl produts 26 300.2 7.3 17 139.5 3.0 31 181.3 2.3 54 408.4 4.1 39 328.5 3.0 29 173.6 0.9M.ocblnoy 23 124.1 3.8 23 236.1 5.0 35 233.6 3.2 44 394.3 3.9 40 457.0 4.3 28 301.3 1.6Trans.port eqipment 6 88.3 2.2 8 759.5 16.3 8 126.7 1.5 9 83.0 0.8 11 18.2 0.2 8 159.8 0.9others 10L 44.6 1.1 15 47.4 1.0 13 51.8 0.7 It 63. 7 0.8 12 54. 8 5.5 7 25.3 0.1

S.ehtenl.:Mo..font. indo-tris 149 1,697.3 41.6 152 1,621.7 34.7 179 1,308.6 16.6 228 3,190.7 31.7 216 1,970.9 18.3 163 1,652.2 8.7ting nod qearrYitt 6 18.3 0.4 3 5.0 0.1 8 28.5 0.4 8 12.3 0.1 3 3.6 *2 2.8 *

Fishing - 1 60.0 1.3 1 5.0 0.1 25 4. 0.4 3 19.5 0.2 2 14.5 01-Betilding 1 25.0 0.6 3 5.9 01 5 12. 0. 1 1,6326 1.2 1 58.6 5.2 2 11.5 0.1Elootnin p-o 3 585.0 14.3 2 520.0 11.2 1 600.0 7.6 2 550.0 5.5 9 563.0 5.2 4 1i62.4 8.3

Snbtotels-Oodnsti.tal Crdit 159 2.323,0 56.9 161 2,212.6 47.4 194 1.955.0 24.9 272 3,430.4 535.9 242 3,115.6 20.9 T 3T 5,227.4 17.2ietnk-fenn 5 239.6 0.9 14 D6.5 0.1 22 9.8 0.4 31 96.4 0.9 54 160.5 1.6 74 171.3 0.9

Tronporn ond oom nic-ti- 2 200.0 4.9 10 707.4 15.2 13 645. a.2 18 1,2866.6 12.6 15 986.3 9.2 5 358.4 1.9Other serums 2 8. 1.2 4 70.4 1.5 3 113.4 1.5 6 51.1 0.5 3 29.0 0.3 1 0.5 __

Seb.tenls: Diren Crodin 168 2,611.4 63.9 179 2,996.9 64.2 232 2,744.0 35.0 327 6,834.5 67.9 314 4,299.4 40.0 2753 3,750.6 20.0

Indi-ot Cr-dfo 1/M...nfatertng indeot,,ios 47 723.3 17.7 48 1,540.5 33.8 50 4,525.9 57.6 97 2,832.8 28.3 118 5,436.9 50.5 122 14,251.0 75.8BetIding 2 4.5 0.1 4 103,9 2.2 7 580.0 7,4 11 382,1 3.8 27 951.0 0.8 02 666.8 3.3

Olnntnirpo.esr 1 48.5 ~~~~ ~ ~ ~ ~~~ ~~ ~~~~~1. .- - - - 1 2.8 * 3 4.6 * --

Trans. port and aiain 7 697.6 17.1 - - - -- - - -- -Onh-r sertrn--- 9 ~ 30.4 0.6 1 0.9 * -- - 4 69.5 0.6 9 123.6 0.7

Sehntatls: Indiront Credit 57 1439 36.1 61 17674.8& 35.8 58 5.106,0 65.0 109 3.237,7 32.1 152 6,6. 60.0 148 15,041.6 60.0O

TOTALS M5 4,083.3 ~1O0 M 46L 108,L 0 -- 785 L%0 iL I2.21 10040 466 12 761 4 180.0 9 11§W i

81 nO en 1,0030 48 32.6 0.8 57 32.1 0.7 68 43.3 0.6 80 46.8 0.5 81 49.4 0.5 1 04 40.2 0.31,000,001 to soc 5.D000.03 92 245.0 6.0 94 250.9 5.4 115 3294 6.2 181 538.7 5.3 182 583.7 4.7 149 389.1 2.1

nen5,8818 toast 140.080,008 20 240.8 5.9 31 2205.8 4.8 41 32 2.0 4.1 55 4089.9 4.1 63 4097.6 4.6 47 349.5 1.9en10.00000 noes 5,000,000 20 330.0 8.1 27 498.0 10.4 27 500.7 6.6 66 1,125.4 11.2 57 1,116.4 10.4 33 563.3 3.0

out 25,008,001'O) to e 50,808.0000 20 7209.7 17.9 9 342 .6 7.3 13 4066.6 5.9 21 742,2 7.4 35 1.284.4 11.9 24 985.4 5.2sc50.808, 00 1 t 0 180.08808 7 625.9 15,3 11 788.2 16.9 13 1,075.6 13.7 19 1,395.1 13.8 24 1,882.9 17.5 14 1,128.7 6.0

10.800,001 to san 250,000,000 6 1.031,5 25.2 8 1,544.1 33.1 8 1,436.4 18.3 10 1,896.5 18.8 22 3,571.2 53.2 1eon 250,88.8 toot1000,000,800 2 850.8 20.8 3 1,000.0 21.4 3 1,315.8 16.7 5 2,417.6 24.0 4 1,855.6 17.02 28 15,324.0 81.5

becen1.000.000,00 M 2 t2&! 501 1 58 4. - )

TOTALS LZ , 4-M.5- 129U ZiO L LZ' 1O08.0 290 EM 24 OL 20 43 6 10.07241 ISii. L6t ILZgI4 108~ 0 40 184 00a2 100.0

L.OCATION8 (Branh offito)

A-iro 19 80.5 2.8 13 118.6 2,5 28 2117,8 2.18 30 194. 3 1.9 31 151.2 1.2 22 90.5 0.5Deja 1 1.7 e 2 1.4 5 10.7 0.1 6 31.7 0.3 7 7.8 0.1 2 3.2 -Brag. 17 68.2 1.7 9 38,9 0.8 16 62.5 0.8 21 126.0 0.2 12 65.9 0.6 18 1033 .6 0.7

1 1.5 3 4.5 0.1 2 2.9 2/ - -- - . 2 3.5C.sl Brnc 6 40.9 1.8 6 15.3 0.3 4 6,2 0.1 6 51.8 0.3 3 5.2 n 17 5.7 0.3C. Ibao 1 68. 1.7 7 13.8 0.5 3 42.0 0.5 16 109.9 1.1 10 55. 0.5 9 19. 0.1

trors 0 ~ ~~~~~~~~~ ~~ ~~~~ 28.3 0,7 4 0.9 * 3 10.0 0.1 9 27.9 0.3 9 67.6 0.6 11 2 3 .9 0.1fore 4 6.8 0.2 14 215.9 4,6 11 80.4 1.0 10 79.1 0.8 19 84.4 0.8 12 70.4 0.4Corda 2 14.3 0.3 3 13.3 0.3 1 20.0 8.5 3 18.5 0.2 4 12.4 0.1 5 14.0 0.1ttLa 11 493 1.2 13 26. 0.6 24 1405.0 1.8 30 186.5 1.9 38 195.1 1.8 21 78.2 0.4Lisb!a 54 1,547.~7 37.8 56 1,8969.6 40.7 73 2.221,8 28.5 110 4,727.4 46.9 140 6,112.0 56.8 126 8,865.7 47.2

Pocrologre - - - - ~ ~~ ~ ~ ~ ~~~~ ~~~~ ~ ~~~~- - 2 7.5 0.1 6 181.8 1.8 14 58.1 0.5 1 1M5 *Por 36 1,452.0 35.5 47 914.6 19.6 44 1,018.5 13.0 72 707.4 7.0 68 633.4 7 .7 48 1,956.5 10.4

Sonrsre 14 140.8 3.4 12 47 .0 1.0 17 39.1 0.5 35 2445 2.4 18 94.1 0.9 30 154.9 0.7Set'bal 23 420.4 10.3 30 1,055.0 22.6 33 2,070,3 26.4 48 3,169.0 31.5 57 2,0D48.7 19.0 42 5,1 44.8 27.4Vteno del2sll 4 89.6 2.2 1 244.3 5.2 6 1,441.1 18.4 8 68.2 0.7 7 905.6 8.4 3 2,104.4 1.2Vile Real. - - 8 12.1 0.3 7 18.0 0.2 4 23.4 0.2 7 12.6 0.1 6 23.4 0.1Olse 5 8.2 0.2 3 2.7 0.1 5I2 109.5 2/ 1.4 4 35.66 0.4 7 134 8.1 11 55.7 0,3

Sehcl-ls 223 4,819.3 98.4 237 4,624.7 99.0 287 -/ 7,773.5 99.0 418 9,963.0 901.9 451 10.703.2 99.5 394 19,008.0 99.9

Al :11 ~ ~~ ~~~1 33.01 0.8: 65.0 0.28 15 8. . 6 26.6 0.2 1 0.7Oladerta 0 ~ ~~~~~~~~~ ~ ~ ~~~ 33.0 0. 3 48 1. 2 1.5 82 2 73 .1 9 31.6 0.3 6 1.5 .

TOTALS 72 8 0. 4 .7, 0, 2., 7850.8 100.0 436 1/ io,ogg- 100 0 466 'L76 1 4

1004 .1 2404 .

DURATION OP 1,O8SMor hnI no 3 er 20 116.7 2,8 5 83.2 1.8 9 173.7 2.2 37 1,169.7 11.6 27 591.6 5.5 36 878,4 4.7

Moetha 37oSyos01 322.9 7,9 82 423. 9.1 99 487,6 6,2 126 443.1 6.4 174 1,769.2 16.4 129 781.5 4.1Morn then 0t 7 years 131 5,315,4 81.2 147 3,205,2 68.6 159 2,679,4 36.1 257 5,191,1 51.5 245 5,2908.5 49.2 221 14,319.2 54.9More than7 yoar 3 330.3 8,1 6 837,7 20.5 23 4,510.1 57.5 16 3 268.3 32,5 20 3,110.1 28.0 15 6,820,9 34.3

TOTALS 225 4LO85.3 102L, 424 44671.7 12204 Z290 ZJf&A 124 426 120l72 3 1L2 L62 1l7 4 000 jI 18 80022 ~ 1200.3

0Iles char 0.007.17 listed by nitial. hen.t. sr

erln,for Oat 20 nIlIen _nolooorcl occoceed 1ace ilecded in detil.

Suc:Banto dr Fomenr NotionalMarch1977

BANCO DE FOMENTO NACIOIIAL

Equity Portfolio as of December 31,1975

Number of Par Value Average Cost Balance SheetName of Company Activity 9S4B res Held lnAx Jh Per Share Value

(escudos (escudos) (million escudos)

Operating in Portugal

Amoniaco Portugues Ammonia production 40,000 1,000.0 1,070.4 42.8Companhia de Ferro Nacional (Cofena) Metal ore extraction 6,440 1,000.0 1,000.0 6.4Companhia de Transportes Maritimos Maritime transport 167,421 585.1 1/ 993.2 166.3Companhia Industrial de Portuguale Colonias Noodle products 286 500.0 1,326.6 0.4

Companhia Portuguesa de Celulose Wood pulp and paper 36,663 1,000.0 1,440.5 52.8Companhia Portuguesa Fornos Electricos Non-ferrous metal 2,118 100.0 128.8 0.3Companhia de Seguro de Creditos Insurance 1,221 1,000.0 1,000.0 1.2Companhia de Seguros Tranquilidade Insurance 1,520 500.0 1,214.3 1.8Electricidade de Portugal (EDP) Electricity 337,344 996.8 1/ 1,120.6 378.0Estaleiros Navais de Setubal (Setenave) Ship building 30,000 1,000.0 1,000.0 30.0Maquinas de Escrever (Messa) Typewriter manufacturing 175,000 100.0 100.0 17.5Minas de Vila Cova Coal mining 18,000 1,000.0 1,000.0 18.0Pirites Alentejanas Metal ore extraction 100 1,000.0 1,000.0 0.1Sociedade Financeira Portuguesa Banking 199,900 1,000.0 1,000.0 199.9Sorefame Transport equipment 76,034 1,000.0 1,391.7 105.8

Subtotal - Portugal 1,021,3

Operating in Angola

Companhia de Cabinda Timber industry 78,140 100.0 71.0 5.6Companhia Celulose do Ultramar Portugues Woodpulp, paper & cardboard 18,597 1,000.0 1,000.0 18.6Socidade Algodoeira de Fomento Colonial Cotton and textile industry 10,000 1,000.0 1,000.0 10.0Sorefamse de Angola Transport equipment 200 1,000.0 1,250.0 0.3

Subtotal - Angola 34.5

Operating in Mozambique

Sociedade Lldro-Electrica do Revue Electricity 25,000 1,000.0 844.0 21.1

Grand Total 1,076.9

1/ Average after mergers

Source: Banco de Fomento NacionalNovember 1976


Distribution of Approved Direct Credit Loans by Size of Project

(amounts in thousand escudos)

Size of project 1975 1976Number of Total Direct credit loans Number of Total. Direct credit loansprojects projects amount p projects projects amount %

cost cost

0 - 1,000 32 19,162 13,449 0.3 43 26,403 17,127 0.51,001 - 5,000 113 309,112 183,996 4.3 111 311,439 174,760 4.7

5,001 - 10,000 53 403,636 220,600 5.1 43 310,225 166,685 4.410,001 - 25,000 45 691,429 274,450 6.4 28 459,776 233,650 6.225,001 - 50,000 34 1,070,493 589,500 13.7 9 307,443 187,050 5.050,001 - 100,000 15 1,091,453 540,000 12.6 5 422,014 193,300 5.1100,001 - 250,000 14 2,293,992 1,182,030 27.5 8 1,363,248 650,000 17.3250,001 - 500,000 4 1,391,300 685,000 15.9 4 1,566,000 1,056,000 28.1500,001 - 1,000,000 - - - - 2 1,500,400 1,080,000 28.7

1,000,001 - 1,500,000 2 2,320,000 300,000 7.0 - - - -

over 1,500,000 2 3,390,944 310,365 7.2 - - _

HTotal 314 12,981,521 4,299,390 100 253 6,266,948 3,758,572 100.0==m= =w========== =_S_nt -- =__ =a====m= ___

Source: Banco de Fomento NacionalMarch 1977


Sources of Funds 1971-76(in Z ot DIsbursements)

Includes Overseas Territories Portugal Only1971 1972 1973 1974 1974 1975 1976

Disbursements 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Repayments 22.9 22.4 27.7 15.9 5.6 18.6 19.5Portuguese State (net) 8.2 27.9 8.6 5.8 7.1 (1.5) (3.3)Time deposits (net) 49.4 41.1 36.3 22.7 23.5 1.2 22.0Banco de Portugal (net) 4.8 0.6 4.6 47.1 58.2 81.2 14.7Other credit institutions (net) 11.0 1.7 (4.3) 3.2 0.3 0.6 20.1Other borrowings (net) (2.0) (1.3) 9.3 4.5 5.9 (2.1) (0.9)Share capital - 14.5 4.3 - - - 12.0Gross self-financing 4.0 2.3 4.1 1.7 3.2 6.0 11.9.Other 1/ 1.7 (9.2) (9.4) (0.9) (3.8) (4.0) 4.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Memo:

Disbursements (escudos millions) 3,153.0 4,691.2 4,686.1 7,448.8 6,028.2 7,111.3 8,317.9Disbursements ($ millions ) 2/ 105.1 156.4 156.2 248.3 200.9 237.0 277.3

1/ mainly changes in working capital2/ US$1.00 = Esc 30

KEKENAJ IDFMarch 1977

ANNEX 13Page 1

BANCO DE FONENTO NACIONAL

A. Resource Position as of December 31, 1976(million escudos)

Share capital 2,500.0Free reserves 839.9Undistributed profits 182.0 3,521.9

Time deposits 10,976.2Bonds 426.5Government loans 2,560.7Local currency loans 11,699.3Foreign currency loans 2,916.3

Total resources 32,100.9

Outstanding loans 29,489.4Security portfolio 1,506.4 30,995.8

Available for disbursement 1,105.1

Undisbursed commitments 3,628.5

Available for commitment (2,523.4)

Source: Banco de Fomento NacionalApril 1977

ANNEX 13Page 2

B. Notes to Resources

1. Share capital. The paid-in share capital was increased by Esc 1,000 millionto Esc 2,500 million during 1976.

2. Free reserves. These include the Legal Reserve Fund (the Statutes providethat a minimum of 10% of annual net profits be appropriated to this reserve),the Special Reserve Fund (a minimum of 5% of annual net profits) and OtherReserve Funds. The Guarantee Reserve Fund is not included as it is establishedby the Statutes to cover doubtful debts; funds in this reserve are invested inGovernment bonds or other securities and shown as a separate asset.

3. Time deposits. Over 95% of the time deposits are one year one day deposits(the minimum initial term) which currently yield 12% p.a. BFN's experienceis that these remain on deposit an average of three years. Savings deposits,which BFN has been allowed to accept since 1973, have a minimum term of threeyears. The interest yield is progressive, being 12% for the first year,rising 1/4 of 1% each year after that to a maximum of 13% for the fifth year.The amounts involved so far are relatively insignificant. In 1975 BFN wasallowed to accept six months to one year deposits; these currently yield 11%p.a.

4. Bonds. These consist of local currency bonds and of bonds issuedabroad in 1963 in units of account. All of the proceeds from this foreignissue was lent to the Electricidade de Portugal which bears the foreignexchange risk.

5. Government loans. These consist of the following items;

- Loans and provisions - consisting of Marshall Planloans made to BFN's predecessor, other long-termloans and short-term loans from the Ministry ofFinance which are continually rolled over. Esc 1,156.3 million

- Applications of National Development PromissoryNotes - lent for specific projects contained inearlier Development Plans (e.g. railways). 725.0

- Special account - consisting of principalrepayments and interest payments received onloans made from Marshall Plan donations.Being donations, these funds carry no charge andare not to be repaid. The original loans, andthe offsetting liability, are labelled Counter-part Funds. 482.3

ANNEX 13Page 3

- Surplus of the participation in the Bank'scapital - being the excess of the Government'sequity holding in BFN's predecessor over theGovernment's equity holding in BFN; this isrepayable to the Government, though without aspecified amortization schedule, and hence istreated as a loan. 197.1

Total Esc 2,560.7 million

Not included are Counterpart Funds and Committed Financing as these arerepresented by specific investments (which are not included under OutstandingLoans).

6. Local currency loans. These consist of loans from the following localinstitutions:

Banco de Portugal Esc 10,904.3 millionCaixa Geral de Depositos 595.0Fundacao Gulbenkian 200.0

Total Esc 11,699.3 million

7. Foreign currency loans: These consist of the following lines of credit:

- Midland Bank - L3.0 million to finance purchaseof British goods and services; contracted inDecember 1974; interest rate is 2-2.5% above theLondon interbank offering rate depending upon thecircumstances; sub-borrower bears foreign exchangerisk and pays interest at 2-2.5% above what BFNpays; repayment of subloans over 4 or 5 years,depending on size. Esc 156.9 million

- Credit Commercial de France - FF 85 million tofinance purchase of French goods and services;contracted in April 1975; interest rate is thelegal rate in France for export financing(currently 7.2% for loans of 2-5 years and 7.5%for loans over 5 years); sub-borrower bears foreignexchange risk and pays interest at 1% above whatBFN pays; repayment terms are dependent on size ofsubloans and vary from 18 months to 5 years. 538.9

ANNEX 13Page 4

- Midland Bank - up to t2.8 million to finance

purchase of British goods and services by aspecific Portuguese firm (a polyester plant);contracted in May 1975; interest rate fixed at7%; subborrower bears foreign exchange riskand pays interest at 8.5%; repayment over 5years. Esc 146.4 million

- European Investment Bank - U.A. 15 million

(about $18 million equivalent); procurementuntied but European suppliers to be consulted;contracted in April 1976; guaranteed by theGovernment; for small and medium size projects(total cost of fixed assets up to U.A. 8 million)maximum size of subloans limited to U.A. 1.6million; interest rate of 9.5% of which EECrebates 3%; BFN pays 3% to government as feefor its bearing foreign exchange risk; sub-borrowers pay normal interest rate; repaymentby BFN over 11 years including 4 years grace. 500.0

- Kredietbank of Luxembourg - 50 million Furodollars;$30 million earmarked for the Electricidade dePortugal on which BEN receives 0.1% p.a. (EdPalso paid part of the cost of arranging the loan),remaining $20 million available for BFN's normallending activity at interest rates of 1-1.5% abovewhat BFN pays; interest rate at 1-7/8% above theLondon interbank offering rate for the currencydrawn; subborrowers bear foreign exchange risk;repayment over 5 years. 1,574.1

Esc 2,916.3 million

8. In addition to the above lines of credit, BFN manages anIndustrial Development Fund made available to Portugal by the six membersof the European Free Trade Association plus Finland. The Fund will totalSDR 84,604,516 (about $100 million or Esc 3,000 million equivalent), to bemade available in five equal annual installments. Repayment will be in15 equal annual installments after a ten-year grace period. The fund willfinance projects that have been appraised by BFN in its normal fashion. Theemphasis will be on small and medium size projects. A "substantial part"(agreedas 50%) of the resources of the Fund will be used for procurement within the EFTAarea, including Portugal. The Fund will bear no interest during the first fiveyears and 3% thereafter. Loans made from the Fund will bear the normal rate ofinterest changed by BFN. The Government will bear the foreign exchange risk.Up to 10% of the Fund can be used for loans on more favorable terms (relating to,e.g., security, amortization, rate of interest) for projects of particular impor-

tance or to finance project studies, technical assistance or research. There is afree limit of SDR 1.2 million for normal loans and SDR 200,000 for soft loans andan aggregate free limit of one-half of the assets in the fund in any year; loansabove the free limit must be approved by the Steering Committee composed of onemember from each contributing state. The accounts of the Fund will be keptseparate from BFN's regular accounts.

BANCO DE FOMENTO NACIONALGeographical and Sectoral Breakdown of Portfolio _/

(as of December 31, 1975)(amounts in million escudos)

Total PortuRal A f r i c a n C o u n t r i e sSub-total Angola Mozambique Others

No. Amount No. Amount No. Amount No. Amount No. Amount No. AmountLOANS

Industrial credit:Manufacturing industries 1,034 13,852.5 1,032 13,599.4 2 253.1 2 253.1 - - -

Mining and quarrying 25 136.9 24 134.2 1 2.7 1 2.7 - - - -

Fishing 5 20.5 4 15.7 1 4.8 - - - - 1 4.8Bu:lding 16 112.5 16 112.5 - - - - - - - -Electric power 55 3,623.1 51 3,375.5 4 247.6 1 232.1 3 15.5 - _

Subtotals: Industrial Credit 1,135 17,745.5 1,127 17,237.3 8 508.2 4 487.9 3 15.5 1 4.8Livestock-farming 93 191.1 91 186.6 2 4.5 1 0.4 - - 1 4.1Transport and communications 148 3,603.7 146 3,390.7 2 213.0 1 213.0 - - 1 *Other services 17 197.5 14 176.0 3 21.5 - - 1 * 2 21.5Local authorities 6 41.6 - - 6 41.6 - - 1 7.6 5 34.0State 18 1,471.5 9 497.9 9 973.6 1 41.1 6 898.2 2 34.3

Total: Loans 1,417 23,250.9 1,387 21,488.5 30 1,762.4 7 742.4 11 921.3 12 98.7

EQUITY INVESTNENTSManufacturing industries 13 248.4 9 219.6 4 28.8 4 28.8 - - - -

Mining and quarrying 3 24.5 3 24.5 - - - - - - - -Electric power 6 399.1 4 378.0 2 21.1 - - 2 21.1 - -

Livestock-farming 1 5.6 - - 1 5.6 1 5.6 - - - -Transport and communications 3 166.3 3 166.3 - - - - - - - -other services 4 233.0 4 233.0 - - - - _ - - _

Total: Equity Investnents 30 1,076.9 23 1,021.4 7 55.5 5 34.4 2 21.1 - =

BONDSManufacturing industries 5 7.2 5 7.2 - - - - - - - -Electric power 13 116.2 10 81.8 3 34.4 - - 3 34.4 - -

Local authorities 1 1.4 1 1.4 - - - - _ - - -

Total: Bonds 19 124.8 16 90.4 3 34.4 - - 3 34.4 - -===== =_====s _=eS ===_^w__ __ ====== a= ===_= == ==n== = *=s

GRAND TOTAL 1,466 24,452.6 1,426 22,600.3 40 1,852.3 12 776.8 16 976.8 12 98.7

z

* Esc 50,000 or less x1/ excludes investments at risk of Government and Guarantee Fund.

Source: Banco de Fomento NacionalJanuary 1977

ANNEX 15BANCO DE FOMENTO NACIONAL

A.Arrears on Loan Portfolio as of June 30, 1976 Page 1(amounts in thousand escudos)

Amouat-qn^r>:No. of Outstanding % of total Principal Interest Total X of totalLoans principal portfolio arrears

Loans affected by

arrears

A. Length of arrearsUp to 3 months 129 2,155,784 8.2 108,037 58,866 16i,903 7.9

-from 3 to six months 72 1,033,909 3.9 72,523 31,157 103,680 4.9-from 6 to 12 months 132 2,489,886 9.5 262,030 222,590 48'+,620 22.0

-from 12 to 24 months 206 2,311,236 8.8 450,345 325,164 773,509 36.7-over 24 months 51 838,973 3.2 368.384 212,664 581,048 27.5

total 68,829,788 1,261,319 850,461 2,111,760 -10.0

B. Sectors.public enterprises orstate institutions 16 1,228,456 4.7 48,610 10,257 53,867 2.8.nationalized enter-prises 20 1,677,679 6.4 121,330 151,725 273,055 12.9-enterprises with state-majority participation 10 518,273 2.0 99,726 32,763 132,489 6.3

-enterprises with stateminority participation 24 233,483 0.9 160,000 48,176 203,176 9.9-enterprises with stateintervention 28 710,661 2.7 137,152 129,245 266,397 12.6public sector sub-total 98 4,368,552 1X- 566-,81 372,166 938,984 44.5

private enterpriseswith arrears-of less than Esc.5 million 404 1,523,001 5.8 162,807 133,744 296,551 14.0

-Esc 5 to 10 million 44 363,337 1.4 63,114 43,327 106,441 5.0-over Esc 10 million 24 1,275,416 4.7 196,348 117,033 313,381 14.8

private sector sub-total 472 3,11,754 11.8 422,269 294,104 716,373 33.9

entities of formeroverseas territories 20 1,349,482 5.1 272,232 184,171 456,403 21.6

Total 590 8,829,788 33.6 1,261,319 850,441 2,111.760 100.-

Total of loan Portfolio 1,560 26,261,000 100.0

Source: EMENA/IDFAnril 1977

ANNEX 15Page 2

BANCO DE FOMENTO NACIONALP

B. Evolution of Arrears on Loan Portfolio(Amounts in escudo thousands)

Position as of June 30, 1976 Position as of September 30, 1976 Position as of December 30,1976

% of total % change % of % change % ofarrears over previous total over previous total

quarter arrears quarter arrearsAl. Public and nationalized

enterprises

- Number of loans affectedby arrears 36 41 +13.9 21 -48.4

- Principal in arrears 169,940 233,318 *37.3 157,526 -32.5- Interest in arrears 161,982 308,527 +90.5 238,977 --22.5- Total in arrears 331,922 15.7 541,845 +63.2 21.3 396,503 -26.8 14.7

A2. Enterprises with statemajority participation

- Number of loans affectedby arrears 10 14 *40.0 14 -

- Principal in arrears 99,726 134,316 +34.7 199,823 t48.8- Interest in arrears 32,763 45,002 +37.4 66,526 +47.8- Total in arrears 132,489 6.3 179,318 +35.3 7.0 266,349 t48.5 9.8

A3. Enterprises wish stateminority participation

- Number of loans affectedby arrears 24 47 +135.0 50 t6.4

- Principal in arrears 160,000 202,556 + 26.6 241,531 4-19.2- Interest in arrears 48,176 100,242 4108.0 123,909 i23.6- Total in arrears 208,176 9.9 302,798 t45.5 11.9 365,443 +20.7 13.5

A4. Enterprises with stateintervention

- Number of loans affectedby arrears 28 22 -21.4 22 -

- Principal in arrears 137,152 119,366 -13.0 131,442 +10.1- Interest in arrears 129,245 79,530 --38.5 92,121 +15.8- Total in arrears 266,397 12.6 198,896 -25.3 7.8 223,563 +12.4 8.3

A . Sub-total: Public Sector


- Principal in arrears 566,818 689,556 +21.7 730,325 +5.9- Interest in arrears 372,166 533,301 t43.4 521,533 -2.2- Total in arrears 938,984 44.5 1,222,857 +30.2 48.0 1,251,858 +2.4 46.2

B. Entities in former overseasterritories (including Macau)

- Number of loans affectedby arrears 20 23 +15.0 24 +4.3

- Principal in arrears 272,232 300,639 +10.4 328,495 +9.3- Interest in arrears 184,171 238,341 *29.4 249,553 +4.7- Total in arrears 456,403 21.6 538,980 +18.1 21.2 578,048 +7.2 21.4

C. Private enterprises


- Principal in arrears 422,269 470,390 +11.4 540,392 +14.9- Interest in arrears 294,104 313,993 *6.8 335,518 r6.8- Total in arrears 716,373 33.9 784,383 +9.5 30.8 875,910 t11.7 32.4

Total- Number of loans affectedby arrears 590 625 tr5.9 603 -3.5

- Principal in arrears 1,261,319 1,360,585 +15.8 1,599,212 i9.5- Interest in arrears 850,441 1,085,636 +27.7 1,106,604 +1.9- Total in arrears 2,111,760 100.0 2,546,221 +20.6 100.0 2,705,816 t6.3 100.0

EMENA/IDF

April 1977

ANNEX 16BANCO DE FOMENTO NACIONAL

Income Statements 1971-76(million escudos)

Includes Overseas Territories Portugal Only1971 1972 1973 1974 1974 1975 1976

INCOME

Interest and commissions 619.7 835.2 1,064.0 1,362.1 1,109.5 1,955.3 3,108.2Dividends and bond income 50.2 42.9 40.0 41.5 39.7 10.6 5.0Profit on exchange and security

operations 5.3 5.8 12.5 (5.3) (4.9) 30.8 23.2Other income 0.4 2.0 26.3 2.9 7.5 1/ 0.3 0.8

Total Income 675.6 885.9 1,142.8 1,401.2 151 1,997.0 3,137.2

EXPENSES

Interest and commissions 424.8 563.7 731.6 908.9 734.6 1,399.4 1,882.6Administrative expenses 76.2 87.8 123.1 164.7 103.4 139.5 159.6Depreciation 7.2 7.8 16.9 28.6 24.3 32.1 23.5Guarantee fund allocation 7.1 7,0 6.6 7.7 7.7 13.4 60.4Provision for doubtful debts 5.0 29.0 37.0 213.0 204.0 282.0 860.0 3]

Total expenses 520.3 695.3 915.2 1,32 1,074.0 1,866.4 2986.1

GRnss PROFIT 155.3 190.6 227.6 78.3 77.8 130.6 151.1

Provision for taxes and levies 52.9 78.7 96.6 70.0 70.0 40.0 68.5 3/

NET PROFIT 102.4 111.9 131.0 8. =. 90.6 102.6

ALLOCATION OF NET PROFIT(made during following year)

Legal reserve fund 11.0 12.0 14.0 0.8 0.8 4/ 4/Special reserve fund 10.0 10.0 10.0 7.0 6.5Other reserve funds 19.8 Ž1 23.9 8.2 - -Profit sharing among employees 4.1 4.5 7.8Profit sharing among Boards of

Directors and Auditors - 1.5 2.0 Dividends 57.5 60.0 89.0 -Retained earnings -- 0.5 0.5

Net profit 102.4 111.9 131.0 8.3 7.8

GUARANTEE FUND

Balance - beginning of year 118.9 133.1 147.4 161.9 93.4 106.5 125.6Allocation 7.1 6.9 6.6 7.7 7.7 13.4 60.4Income reinvested 6.4 7.2 7.2 10.2 5.4 5.7 5,2Collection of loans written off - 0.7 0.2 0.7 3.4 - _Balance-end of year 133.1 147.4 161.9 183.2 106.5 125.6 =191.2

… - - - - - - - - - - - -…As percentage of average total assets - - - - - - - - - - - - - -

Income 5.9 5.9 6.0 5.9 5.4 7.3 9.3Interest and commission expense 3.7 3.8 3.9 3.8 3,4 5.1 536Gross spread 2.2 2.1 2.1 2.1 2.0 2.3.7Administrative expenses 0.7 0.6 0.6 0.7 0.5 0.5 0.5Other expenses 0.2 0.3 0.3 1.1 1.1 1.2 2.8Gross profit 1.3 1.2 1.2 0.3 0.4 0.5 0.4Provision for taxes and levies 0.4 0.5 0.5 0.3 0.3 0.2 0.1

Net profit -0 == 0.1 03 Q.309 0.7 .7

1/ Includes net profit from overseas territories of Esc 6.9 million.2/ Based on BFN's recommendation to the Minister of Finance that some 85%

of gross profit be allocated to this provision.3/ Mission estimate, based on recomsendation noted in footnote 2.4/ Pending Minister of Finance's approval.5/ Eac 382.2 million was also added to this fund, representing premiums received on sale of new share capital.6/ When BFN was established and took over the existing National Development Fund.

Source: Banco de Fomento NacionalApril 1977

NEX l7


Balance Sheets 1971-76(million escudos)

Includes Overseas Territories Portugal Only

December 31, 1971 1972 1973 1974 1974 1975 i976

ASSETS

Cash and deposits 170.3 579.3 397.7 577.2 367.5 269.6 718.5Other current assets 233.2 412.7 124.1 123.3 173.4 562.9 427.7

Total current assets 403.5 992.0 521.8 700.5 540.9 832.5 1,146.2

Equity investments-market value 1,196.0 1,148.2 1,794.9 1,722.5 1,073.9 1,076.9 1/ )1,506.4Bonds-market value 207.6 209.6 194.9 138.6 674.5 124 8 1/Medium-term loans 7,372.4 9,673.7 11,551.6 17,127.4 14,569.1 17,969.0 22,982.9Long-term loans 2,285.8 2,588.2 3,259.1 3,655.2 2,511.4 4,753.3 6,281.2Debtors due to anticipated financing 19.5 42.8 551.6 434.5 431.4 528.6 225.3Financing for account and by order

of the Portuguese State 646.8 1,681.2 1,919.1 2,281.3 2,281.3 2,361.8 - 2,472.0Values in the account "Portuguese

State-Counterpart Funds" 48.8 40.4 31.5 26.6 26.6 22.0 15.6Values in the guarantee fund 133.1 147.4 161.9 183.2 114.6 127.8 193.6

Total investments 11,910.0 15,531.5 19,464.6 25,569.3 21,682.8 26,964.2 33,677.0

Fixed assets (net) 100.7 155.1 159.3 168.3 144.6 162.3 143.3Other assets 346.7 421.7 574.5 689.6 1,898.2 2/ 2,326.2 2/ _ 2,405.4 -

Total Assets 12 760.9 17A 100.3 20 720.2 2L127.7 24266.5 30r285.2 374371.9

LIABILITIES

Current liabilities 205.6 211.6 403.5 462.8 301.9 504.5 800.6Time deposits 4,987.8 6,913.7 8,613.8 10,306.7 9,064.9 9,150.6 10,976.2Bonds 494.6 431.6 567.2 701.5 549.8 502.2 426.5Portugues State:

Loans and provisions 1,075.7 1,106.5 1,275.2 1,417.0 1,417.0 1,327.3 1,156.3Application of National Deve-

lopment Promissory Notes 538.2 780.0 775.0 725.0 725.0 725.0 725.0Counterpart funds 48.8 40.4 31.5 26.6 26.6 22.0 15.6Special account 442.3 452.5 463.3 469.5 469.5 475.0 482.3Surplus of the participation in the

BanA& capital 197.1 197.1 197.1 197.1 197.1 197.1 197.1Committed financing 646.8 1,681.2 1,919.1 2.255.9 2,255.9 2.240.6 2,232.7

sub-total - Portugues State 2,948.9 4,257.7 4,661.2 5,091.1 5,091.1 4,987.0 4,809.0Loans by credit institutions:

Banco de Portugal 156.2 184.0 399.9 3,908.0 3,908.0 9,685.2 10,904.3Caixa Geral de Depositoa 759.0 790.1 712.0 733.0 733.0 664.0 595.0Midland Bank - - - - - 114.3 )73.9European Investment Bank - 111.0Kredietbac,k - - - - - - 1,574.OBanco de Angola 244.7 339.3 171.8 416.7 - -

Banco Nacional Ultramarino 280.0 276.0 280.0 287.1 - -I.D.C. of South Africa 322.8 278.6 320.5 285.0 - -

sub-total -credit institutions 1,762.7 1,868.0 1,884.2 5,629.8 4,641.0 10,463.5 13,358.2

Other loans - - 200.0 400.0 400.0 300.0 200.0Other liabilities 403.9 502.8 815.7 980.6 768.3 1,033.0 1,431.9Security portfolio appreciation 141.8 123.7 666.8 503.8 503.8 -Provision for doubtful debts 257.0 286.0 323.0 536.0 514.4 796.4 1,656.4

Share capital 1,000.0 1,500.0 1,500.0 1,500.0 1,500.0 1,500.0 2,500.0Legal reserve fund 80.0 91.0 103.0 117.0 117.0 117.8 126.6Special reserve fund 110.0 120.0 130.0 140.0 140.0 146.5 146.5Guarantee fund 133.1 147.4 161.9 183.2 106.5 125.6 191.2Other reserve funds 133.0 534.8 558.7 566.9 566.9 566.9 566.8Retained earnings 0.1 0.1 0.1 0.1 0.1 0.6 79.4Current year's profits - to be allocated 102.4 111.9 131.1 8.2 0.8 90.6 102.6

sub-total net worth 1,558.6 2,505.2 2,584.8 2,515.4 2,431.3 2,548.0 3,713.1

Total Liabilities 124760.=9 171003 204720.2 27.127.7 24,266.5 30.285 2 37_=21*2

Contingent liabilitiesGuarantees 989.3 985.7 1,914.0 2,329.5 1,246.7 1,709.1 2,155.5

mitted but undisbursed loans 1,556.4 1,560.2 1,891.5 1,776.3 1,572.4 1,812.0 3,628.5

1/ cost basis2; i..cludes net overseas assets of approximately Eac 1,700 million.

Source: Banco de Fomento NacionalAnril 1977


Debt-Equity Ratio Calculation 1971-76

(million escudos)

Includes Overseas Territories Portugal OnlyDecember 31, 1971 1972 1973 1974 1974 1975 1976

DEBT

Time deposits 4,987.8 6,913.7 8,613.8 10,306.7 9,064.9 9,150.6 10,976.2Bonds 494.6 431.6 567.2 701.5 549.8 502.2 426.5Portuguese State-total 2,948.9 4,257.7 4,661.2 5,091.1 5,091.1 4,987.0 4,809.0Loans by credit institutions 1,762.7 1,868.0 1,884.2 5,629.8 4,641.0 10,463.5 13,358.2Other loans - - 200.0 400.0 400.0 300.0 200.0

Subtotal 10,194.0 13,471.0 15,926.4 22,129.1 19,746.8 25,403.3 29,769.9

Less: Surplus of Government's participationin capital (equity) 197.1 197.1 197.1 197.1 197.1 197.1 197.1

Counterpart funds (Marshall Plandonation) 48.8 40.4 31.5 26.6 26.6 22.0 15.6

Special account (Marshall Plandonation) 442.3 452.5 463.3 469.5 469.5 475.0 482.3

Committed financing (at Government'srisk) 646.8 1X681.2 1X919.1 2,255.9 2X255.9 2,240.6 2,232.7

Subtotal 8,859.0 11,099.8 13,315.4 19,180.0 16,797.7 22,468.6 26.84Z.2

Plus- Guarantees 989.3 985.7 1j914.0 2,329.5 1.246.7 1.709.1 2,1555

TOTAL DEBT 92848.3 12 085.5 15.229 4 21506 5 18 044.4 24jl77.7 28BS22^7

EQUITY

Net worth 1,558.6 2,505.2 2,584.8 2,515.4 2,431.3 2,548.0 3,713.1

Less: Guarantee fund 133.1 147.4 161.9 183.2 106.5 125.6 191.2Dividends declared 57.5 60.0 89.0 - - - -Profit sharing 4.1 6.0 9.8 - - - _

Subtotal 1,363.9 2,291.8 2,324.1 2,332.2 2,324.8 2,422.4 3,521.9

Plus- Surplus of Government's participationin capital 197.1 197.1 197.1 197.1 197.1 197.1 197.1

Marshall Plan donation 491.1 492.9 494.8 496.1 496.1 497.0 497-9

TOTAL EQUITY 23052.1 2.981.8 3.016.0 3.025 4 =1_185 0 3116. 26

DEBT-EQUITY RATIO 4.80 4.05 5.05 7.11 5.98 7.76 6.88



Indicators 1971-76

Includes Overseas Territories Portugal ly1971 1972 1973 1974 1974 1975 1976

Profitability Indicators

Net profit as % of average net worth 6.7 5.5 5.1 0.3 0.3 3.6 3.3 1/Gross profit as 70 of average net worth 10.2 9,4 8.9 3.1 3,2 5.2 4.8 1/Dividends as % of net profit 56.2 53.6 67.9 - - - -Dividends as % of par value share 5.8 4.0 5.9 - - _ -Book value share as % of par value share 155.9 167.0 172.3 167.7 162.1 169.9 148.5 1/Year of operation 12th. 13th. 14th. 15th. 15th. 16th. 17th.

Operational Indicators

Gross income as % of average total assets 5.9 5.9 6.0 5.9 5.4 7.3 9.3Administrative expenses as 7. of average total assets 0.7 0.6 0,7 0.8 0.6 0.6 0.5Financial expenses as % of average total assets 3.8 4.0 4.1 4.7 4.4 6.2 8.3 1/Administrative expenses/number of professional

staff (in US$000's) 42.8 48.3 59.1 88,3 60.0 76.3 58.7Dividends and realized capital gains as %

of average securities portfolio 2/ 4.4 3.9 4.1 2.7 2.9 3.4 0.4Income from loans as % of average loan portfolio 6.8 6.8 6.8 6.7 6.5 8.6 10.7Volume of approvals/professional staff (in US$000's) 2,744.6 4,170.2 5,404.6 5,754.8 5,142.3 4,956.4 6,447.1Cost of debt as % of average debt 4.7 4.8 5.0 4.8 4,4 6.2 7.0Year-end professional staff 65 66 79 73 71 75 104

Financial Structure Indicators

Total debt/year-end net worth 7.6 6.1 7.4 10.3 9.1 11.2 9.2Long term debt/year-end net worth 6.5 5.4 6.2 8.8 8.1 10.0 8.4Debt/equity (proposed for IBRD agreement) 3/ 4.8 4.1 5.0 7.1 6.0 7.8 6.9Provision for doubtful debts 4/ as % of loans,

equity and guarantee portfolios 3.2 3.0 2.5 2.8 3.0 3.5 5.6 1/Interest coverage ratio 1.4 1.4 1.3 1.2 1.2 1.1 1.1 1/Year-end total assets excluding contingent

liabilities (in US$ millions) 425.4 570.0 690.7 904.3 808.9 1,009.5 1,245.7Year-end total assets including contingent

liabilities (in US$ millions) 510.2 654.9 817.5 1,041.1 902.9 1,126.9 1,438.5Year-end net worth (in US$ millions) 52.0 83.5 86.2 83.8 81.0 84.9 123.8

1/ Based on an allocation to provision for doubtful debts of 85Z of gross profit; see footnote 2, Annex 16.2/ Includes profit on exchange and bonds and bond income.3/ See Annex 18.4/ Includes guarantee fund.

Source: Banco de Fomento Nacional

April 1977

ANNEX 20Page 1


Major Assumptions Underlying the Projections( all forecast amounts are in 1977 prices)

I. Projected Operations

Basic Assumption: BFN projected the percentage of gross fixed capitalformulation (GFCF) within Portugal that it would provide, based on historicaltrends. It used the Bank's preliminary projection of GFCF that was availablein December. The relevant figures are (million escudos):

Year GFCF BFN's % Disbursements

1970 31,060 5.6 1,7401971 36,974 6.2 2,2961972 47,080 6.4 2,9991973 56,891 5.2 2,9361974 65,152 8.2 5,3741975 50,700 12.7 6,4621976 62,000(est.) 11.3 7,005

1977 92,523 7.6 7,0001978 108,530 7.5 8,1501979 125,460 7.5 9,4001980 143,526 7.5 10,8001981 164,194 7.5 12,300

This provided the disbursement figures for direct credit and for credit forproduction and sale within Portugal, i.e. those operations that directly addto capital formation in Portugal. Based on past experience, BFN projectedthat 60% of these disbursements would be for direct credit operations and 40%for production and sale on credit oprations. Of the direct credit disburse-ments, some Esc 3,000 million would be made from the EFTA IndustrialDevelopment Fund.

Export Credit: BFN feels that this relatively new activity will growrapidly, given its importance to helping to solve the balance of paymentsproblem. It therefore projected an average yearly growth in disbursementsof 17%.

Foreign Exchange: Based on past experience BFN projected that 35%of disbursements will be to cover the cost of imported goods and services.

Applicationr.Approvals and Commitments: Overall, BFN projected thatin each year the equivalent of 70% of applications will be approved, 35% ofapplications will be committed and 30% will be disbursed. The pattern,however, is quite different for export credit and for domestic credit.Exporters of capital goods need BFN's approval before they make their bids.Often, though, they fail to win the contract and therefore the approved loanis never committed or disbursed. Thus 85% of applications for export credit areprojected to be approved but only 11% committed and 10% disbursed. For domesticcredit 60% of applications are projected to be approved, 50% committed and 45%disbursed. These figures are based on past experience and take into accountthe time lags between application and final disbursement.

ANNEX 20Page 2

Equity Investments: BFN has projected no equity operations after1977. It anticipates establishing a separate fund to assist firms whose equitycapital has been seriously eroded.

II. Projected Income Statements

Interest Income: BFN's loan agreements contain a provision allowing itto adjust the interest rate as and when the Central Bank changes the maximuminterest rate that can be charged. Thus, most of BFN's loan portfolio earns themaximum interest that can be charged (there are several loans that carry a lowerrate as the borrower carries the foreign exchange risk). However, the pro-jections are based on a level 11.5% p.a. interest rate from 1977 onwards.

Interest Expense: All borrowings, including deposits, are assumedto cost 9.5% p.a.

Administrative Expenses: This item is projected to increase at 16.5%p.a., the same increase projected for the loan portfolio, reflecting staffadditions and normal increments.

Guarantee Fund Allocation: This fund is established by BFN's Statutesas a reserve for doubtful debts. The annual allocations are designed to maintainthe fund at 0.5% of the loan portfolio.

Provision for Doubtful Debts: The annual provision of Esc 250 millionhas been somewhat arbitrarily set. It will increase this reserve to just under4% of the investment portfolio by 1979, maintaining it at this level thereafter.

Dividends: As the Government is the sole shareholder, no dividendsare projected.

III. Projected Cash Flow Statements

Time Deposits: BFN projects an annual increase in time deposits ofEsc 1,500 million. Such increases were experienced before the revolution.

Certificates of Deposit: BFN anticipates issuing certificates ofdeposit for the first time in 1977. It is expected that commercial banks andother speicalized credit institutions with excess liquidity would purchase them,in line with guidelines issued by the Central Bank. The terms and conditionsremain to be worked out.

Local Loans: This category includes loans from the Government, theCentral Bank and Caixa Geral de Depositos as well as local bond issues. Theprojections assume no new bond issues as the Government is expected to continue

dominate the local market, paying higher interest rates than BFN could afford.is category is assumed to be the balancing item among local currency sourcesnd uses.

New Foreign Loans: This category, which includes the proposed Bankloan, is assumed to be able to cover all foreign exchange disbursements notcovered by existing foreign loans. Repayments of all foreign loans is assumedto be covered by repayments received by BFN from its borrowers.

ANNEX 20Page 3

Share Capital: The increase in 1977 is expected to be made throughthe conversion of Esc 1,000 million of existing loans from the Government andthrough a cash payment of Esc 500 million. Future increases, which are timed toto maintain a debt/equity ratio of less than 6 to 1, are expected to be incash.

IV. Projected Balance Sheets

Managed Funds: Outstanding loans made from EFTA Industrial DevelopmentFund are shown as a contra-account as they are to be accounted for separately.

Source: Banco de Fomento Nacional and EMENA/ IDFMarch 1977

ANNEX 21Page 1


Projected Operations(million escudos)

1976 1977 1978 1979 1980 1981APPLICATIONS (Actual)

Direct CreditIndustrial Credit 6,145 8,000 9,050 10,400 11,850 13,450Other Direct Credit 1,536 2,000 2,250 2,600 2,950 3,350

Subtotals 7,681 10,000 11,300 13,000 14,800 16,800

Production and Sale on Credit 3,727 5,400 6,800 7,900 9,100 10,500

Export Credit 8,291 10,000 11,000 14,000 16,000 18,000

Total Applications 19,699 25,400 29,100 34,900 39,900 45,300

APPROVALSDirect Credit

Industrial Credit 3,277 4,800 5,420 6,240 7,100 8,060Other Direct Credit 531 1,200 1,360 1,560 1,780 2,020

Subtotals 3,758 6,000 6,780 7,800 8,880 10,080

Production and Sale on Credit 3,225 3,250 4,080 4,740 5,460 6,300

Export Credit 11,817 8,500 9,350 11,900 13,600 15,300

Total Approvals 18,800 17,750 20,210 24,440 27,940 31,680

COMMITMENTS 1/Direct Credit

Industrial CreditLocal currency 2,149 2,120 2,660 3,085 3,570 4,090Foreign exchange 1,157 1,140 1,420 1,660 1,925 2,205

Subtotals 3,306 3,260 4,080 4,745 5,495 6,295Other Direct Credit

Local currency 537 530 665 775 890 1,020Foreign exchange 290 280 355 415 480 550

Subtotals 827 81C 1,020 1,190 1,370 1,570Total Direct Credit

Local currency 2,686 2,650 3,325 3,860 4,460 5,110Foreign exchange 1,447 1,420 1,775 2,075 2,405 2,755

Subtotals 4,133 4,070 5,100 5,935 6,865 7,865

Production and Sale on CreditLocal currency 1,938 1,760 2,210 2,570 2,975 3,410Foreign exchange 1,043 950 1,190 1,385 1,600 1,835

Subtotals 2,981 2,710 3,400 3,955 4,575 5,245

Export CreditLocal currency 832 720 785 1,010 1,160 1,300Foreign exchange 447 390 435 545 620 700

Subtotals 1,279 1,110 1,220 1,555 1,780 2,000

Total CommitmentsLocal currency 5,456 5,130 6,320 7,440 8,595 9,820Foreign exchange 2,937 2,760 3,400 4,005 4,625 5,290

Totals 8,393 7,890 9,720 11,445 13,220 15,110== ===__= EFTA Fund

1/ excludes EFTA Fund

ANNEX 21Page 2

1976 1977 1978 1979 1980 1981(Actual)

DISBURSEMENTS 1/Direct Credit

Industrial CreditLocal currency 2,103 1,905 2,390 2,775 3,215 3,680Foreign exchange 1,132 1,025 1,280 1,495 1,730 1,985

Subtotals 3,235 2,930 3,670 4,270 4,945 5,665Other Direct Credit

Local currency 526 475 600 695 800 920Foreign exchange 283 255 320 375 435 495

Subtotals 809 730 920 1,070 1,235 1,415Total Direct Credit

Local currency 2,629 2,380 2,990 3,470 4,015 4,600Foreign exchange 1,415 1,280 1,600 1,870 2,165 2,480

Subtotals 4,044 3,660 4,590 5,340 6,180 7,080

Production and Sale on CreditLocai CULLCLIL,_y 1,925 1,585 1,990 2,315 2,680 3,070Foreign exchange 1,036 855 1,070 1,245 1,440 1,650

Subtotals 2,961 2,440 3,060 3,560 4,120 4,720

Export CreditLocal currency 614 650 710 910 1,040 1,170Foreign exchange 331 350 390 490 560 630

Subtotals 945 1,000 1,100 1,400 1,600 1,800

Total DisbursementsLocal currencv 5,168 4,615 5,690 6,695 7,735 8,840Foreign exchange 2,782 2,485 3,060 3,605 4,165 4,760

Totals 7,950 7,100 8,750 10,300 11,900 13,600

EFTA FUNDCommitments - 1,000 556 556 556 556Disbursements - 900 500 500 500 500

1/ excludes EFTA Fund

Source:Banco de Fomento Nacional and EMENA/IDFMarch 1977


Projected Income Statements 1977-81(million escudos)

1976 1977 1978 1979 1980 1981(actual)

IncomeInterest and commissions 3,108 3,537 4,063 4,698 5,429 6,256Dividends and bond income 5 6 6 6 6 6Profit on exchange and security operations 24 20 30 40 45 50

Total income 3,137 3,563 4,099 4,744 5,480 6,312

ExpenseInterest and commissions 1,883 2,656 3,022 3,430 3,876 4,389Administrative expenses 160 200 230 270 300 350Depreciation 23 25 35 40 60 70Guarantee Fund allocation 60 20 25 30 33 38Provision for doubtful debts 860 1/ 250 250 250 250 250

Total expenses 2,986 3,151 3,562 4,020 4,519 5,097

Gross Profit 151 412 537 724 961 1,215

Provision for taxes and levies 48 20 20 20 20 20

Net Profit 103 392 517 704 941 1,195

1/ Based on BFN's recommendation to the Minister of Finance that 85% of grossprofits be allocated to this nrovision.

Source: Banco de Fomento Nacional and EMENA/IDFApril 1977

ANNEX 23


Projected Balance Sheets 1977-81(million escudos)

1976 1977 1978 1979 1980 1981(actual)

ASSETSCurrent assets 1,146 970 1,100 1,220 1,350 1,420

Investments 1/Equity ) ( 2,470 2,470 2,470 2,470 2,470Bonds 1,506 ( 125 125 125 125 125Loans 29,490 32,725 37,775 43,720 50,460 58,060Counterpart funds 16 6 - - - -

Subtotals 31,012 35,326 40,370 46,315 53,055 60,655

Values in the guarantee fund 194 164 189 219 252 290Fixed assets (net) 143 240 340 460 460 460Other assets 2,405 2,250 2,300 2,350 2,400 2,450

Total Assets 34,900 38,950 44,299 50,564 57,517 65,275

LIABILITIESCurrent liabilities 801 1,200 1,100 1,300 1,600 1,850

Certificates of deposit - 500 1,000 1,500 2,500 3,500Time deposits 10,976 11,500 13,000 14,500 16,000 17,500Bonds 347 282 232 182 132 82Local loans 1/ 14,036 13,079 13,183 12,221 11,868 11,469Foreign loans:

Units of account bonds 80 40 - - - -Midland Bank 174 269 202 135 68 -Credit Commercial de France - 479 359 239 119 -E.I.B. 111 500 500 500 464 392Kredietbank 1,574 1,350 1,050 750 450 150New loans - 1,517 4,577 8,087 11,872 15,835

Subtotals-foreign loans 1,939 4,155 6,688 9,711 12,973 16,377

Subtotals-debt 27,298 29,516 34,103 38,114 43,473 48,928

Other liabilities 1,432 1,120 1,190 1,260 1,330 1,400Provision for doubtful debt 1,656 1,297 1,547 1,797 2,047 2,297Guarantee fund 191 164 189 219 252 290

Share capital 2,500 4,000 4,000 5,000 5,000 5,500Reserves 1,022 1,653 2,17W 2,°74 1 ,°1 5,nl

Subtotals-net worth 3,522 5,653 6,170 7,874 8,815 10,510

Total liabilities 34,900 38,950 44,299 50,564 57,517 65,275

Contingent liabilitiesGuarantees 2/ 2,156 2,870 3,396 3,917 4,384 5,007Committed but undisbursed loans 2/ 3,628 1,982 2,952 4,097 5,417 6,927

Managed fundsEFTA Industrial Development Fund - 1,000 1,390 1,740 2,050 2,325

1/ excludes financing for account and by order of thePortuguese State from assets and committed financingfrom liabilities.

2/ mission estimate

Source: Banco de Fomento Nacional and EMENA/ IDFApril 1977


Projected Cash Flow Statements 1977-81(million escudos)

1977 1978 1979 1980 1981

SourcesNet profit 392 517 704 941 1,195Non-cash charges 275 285 290 310 320Loan repayments 3,165 3,700 4,355 5,160 6,000Counterpart fund loan repayment 8 6 - - -Time deposits (net) 1,500 1,500 1,500 1,500 1,500Certificates of deposits (net) 500 500 500 1,000 1,000Local loans (net) (1,030) 104 (962) (353) (399)Foreign loans:

Existing loans 968 - - - -New loans 1,517 3,060 3,605 4,165 4,760

Share capital 1,500 - 1,000 - 500Decrease/(Increase) in working capital (270) (230) 80 170 180Net effect of other assets and liabilities 20 20 20 20 20

Totals 8,545 9,462 11,092 12,913 15,076

UsesEquity investments 1,000 - - - -Loan disbursements:

Local currency 4,615 5,690 6,695 7,735 8,840Foreign exchange 2,485 3,060 3,605 4,165 4,760

Foreign loan repayments:Existing loans 284 527 487 523 559New loans - - 95 380 797

Fixed assets 105 135 160 60 70Repayment of bonds 56 50 50 50 50

Totals 8,545 9,462 11,092 12,913 15,076

Source: Banco de Fomento Nacional and EMENA/IDFMarch 1977


Projected Indicators 1977-81

1977 1978 1979 1980 1981

Profitabi]ity Indicators

Net profit as % of average net worth 8.3 8.7 10.0 11.3 12.4Gross profit as % of average net worth 8.8 9.1 10.3 11.5 12.6Dividends as % of net profit - - - - -Dividends as % of par value share - - - - -Book value share as % of par value share 141.3 154.2 157.5 176.3 191.1Year of operation 18th. 19th. 20th. 21St. 22nd.

Operational Indicators

Gross income as % of average total assets 9.8 9.8 10.0 10.1 10.3Administrative expenses as % of average total assets 0.6 0.6 0.7 0.7 0.7Financial expenses as % of average total assets 8.0 7.9 7.8 7.7 7.6Administrative expenses/number of professional staff

(in US $000's) 57.7 58.9 59.0 61.5 60.9Dividends and realized capital gains as % of

average equity portfolio 1/ 1/ 1/ 1/ 1/Income from loans as % of average loan portfolio 11.5 11.5 11.5 11.5 11.5Volume of approvals/professional staff (in US$ 000's) 4,551.3 4,491.1 4,655.2 4,776.1 4,591.3Cost of debt as % of average debt 9.5 9.5 9.5 9.5 9.5Year-end professional staff 2/ 130 150 175 195 230

Financial Structure Indicators

Total debt/year-end net worth 6.1 6.4 5.7 5.8 5.4Long-term debt/year-end net worth 5.2 5.5 4.8 4.9 4.7Debt/equity (proposed for IBRD agreement) 5.7 6.1 5.3 5.4 5.1Provision for doubtful debts 3/ as % of loans, equity

and guarantee portfolios 3.8 4.0 4.0 4.0 3.9Interest coverage ratio 1.2 1.2 1.2 1.3 1.3Year-end total assets excluding contingent liabilities

(in US$ millions) 1,298.3 1,476.6 1,685.5 1,917.2 2,175.8Year-end total assets including contingent liabilities

(in US$ millions) 1,460.1 1,688.2 1,952.6 2,243.9 2,573.6Year-end net worth (in US$ millions) 188.4 205.7 262,5 293.8 350.3

1/ no dividend income is forecast2/ mission estimate3/ includes guarantee fund

Source: EMENA/IDF

March 1977

ANNEX 26Page 1


Strategy Statement for the 1977-78 Period

(Approved by the Board of Management on December 16, 1976)

(Preliminary version to be revised after approval of the 1977-80 plan)

1. In the line with the Government's Program of August 1976 and

particularly with the industrial policies outlined in the Government's

Program, BFN's activity in the next two years will be developped so as to

achieve the following objectives:

a) to contribute to the recovery of the national economy and to the solution

of the current unemployment and balance of payments problems through the

financing of a significant portion of the national gross formation of

fixed capital and of the production of investment goods for exports, the

promotion of industrial projects, the encouragement to the necessary

structural changes and the finding of suitable solutions to the current

problems of debt rescheduling and undercapitalization;

b) to improve BFN's capacity to mobilize domestic and foreign financial re-

sources in accordance with principles of growing diversification of sources

of financing and adequate balance between internal and external resources;

and

c) to strengthen BFN's organizational structures, internal procedures and

working methods.

ANNEX 26Page 2

I. Financing and promotion activities

2. BFN intends to take part in the financing of some important

investment projects to be undertaken by public enterprises particularly

in the heavy industry and power sectors. Although the basic appraisal work

for these projects will be carried out by the responsible ministries or

public enterprises, BFN will maintain an independent judgment on the merits

of the projects and their suitability for BFN financing.

3. A major part of BFN's loans will be for medium-sized projects,

mainly in the private manufacturing sector, where its influence can be par-

ticularly crucial in helping to design the project adequately and in encou-

raging the necessary restructuring measures. Priority will be given to

investment projects that create a significant number of jobs, earn or save

foreign exchange or contribute to regional development.

4. BFN will also be active in supporting small scale industry.

The appraisal of these smaller projects will involve BFN's regional branch

offices and be conducted according to a simplified format making use of

sectorial and regional parameters. One of the priorities in this respect

will be investment projects sponsored by displaced persons from the former

overseas territories.

5. In the framework of its industrial promotion activities BFN

will identify in selected industrial subsectors (to be determined in accord-

ance with the forthcoming plan) projects for which it will support the pre-

paration of feasibility studies.

6. BFN is studying the establishment of a system to purchase par-

ticipations in companies suffering severe undercapitalization but showing

prospects for recovery and also to provide equity for new ventures when the

promoters have insufficient funds of their own. Such participations in

equity would be sold back to the entrepreneurs over time in agreement with

previously defined terms.

ANNEX 26Page 3

7. BFN will seek to resolve the problems created by significant

arrears on loans granted to public and private enterprises through a real-

istic rescheduling of the amortization schedules taking into account the

prospects for economic recovery. Future repayments will be monitored closely.

II. Mobilization of resources

8. Following the recent increase in capital subscribed by the State,

representing an inflow of Esc 1 billion in fresh funds, new negotiations are

now in process in view of a further capital increase through the conversion

into equity of loans from the State.

9. BFN is also negotiating with the Government and the relevant

credit institutions the possibility to obtain at a favourable cost loans

from national credit institutions experiencing a liquidity surplus. The

progress achieved on this will allow BFN to reduce in the future its depen-

dence on rediscounts from the Central Bank.

10. To increase its mobilization of domestic savings, BFN intends

to propose new savings mechanisms (including certificates of deposit), to

launch a campaign of mass-media advertising and to strengthen the mobiliza-

tion efforts of its regional branch offices.

11. BFN will diversify its sources of financing in the international

capital market in order to meet the foreign exchange needs associated with

the projects it finances.

III. Strengthening of organizational structures, internal

procedures and working methods

12. BFN intends to carry out in the course of 1977 an important

reorganization of its structures after consultation with the staff and

ANNEX 26Page 4

careful deliberation on all aspects of the reorganization in order to

achieve a better implementation of its objectives. An important aspect

of this reorganization will be some decentralization of the project

appraisal work to the regional branch offices.

13. BFN intends to reinforce its staff and intensify their pro-

fessional training. In particular in the field of project appraisal

techniques, BFN intends to organize internal seminars and to introduce

improved methods of financial and economic analysis.

14. BFN intends to strengthen its capacity to supervise on going

loans with a view to detecting at an early stage difficulties experienced

by borrowers and to assist them in taking adequate measures.

15. BFN intends to reinforce its systems of management planning

and control and to adopt an improved system of electronic data processing.

ANNEX 27


Estimated Schedule of Disbursements(US$ millions)

IBRD Fiscal Year and Quarter Disbursements CumulativeDuring Quarter Disbursement

1978

September 30, 1977 0.3 0.3December 31, 1977 0.6 0.9March 31, 1978 0.9 1.8June 30, 1978 1.5 3.3

1979September 30, 1978 3.0 6.3December 31, 1978 4.5 10.8March 31, 1979 6.0 16.8June 30, 1979 7.0 23.8



Source: EMENA/ IDF

April 1977

Report No. 1462a-PO Appraisal of Banco de Fomento Nacional ... · CURRENCY EQUIVALENTS Until 1971 1...

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