S&P believes that ‘a faster economic recovery could result from further improvements in business environment, including an acceleration of the privatization process and government arrears clearance.
Analysts tell Kathimerini they view the government’s program as a step in the right direction, with Standard & Poor’s noting it will be credit positive toward the country’s rating, as long as the pledges to creditors are fulfilled.
The economists stress that the key to a faster economic rebound in Greece and to the ambitious growth target of 4 percent in 2020 is in strengthening investment and accelerating privatizations and major projects, as well as significantly reducing bad loans in the credit sector.
Athanasios Vamvakidis, head of G10 FX strategy at Bank of America Merrill Lynch says reducing the heavy tax burden of the Greek economy is certainly welcome. “However, to make sure the government also respects the agreed fiscal targets with the creditors and to safeguard debt sustainability, the focus should now shift to reducing spending where possible and, even more important, reforms to attract investment from very low level and increase growth.”
“It seems that the government has opted for a shotgun approach in terms of tax cuts,” notes Wolfango Piccoli, Co-President of Teneo Intelligence: “This is not surprising as after several consecutive tax increases since 2010, households and businesses are expecting tax relief. However, it could be said that the tax cuts could have been more targeted. Regardless, the bottom line is that tax cuts do not automatically generate growth, and certainly not in the short term. Leaving aside the likely tough talks ahead with the creditors on how to square these tax cuts with the 3.5 percent primary surplus target, cutting taxes is the easy part of the job.”
He adds that “the real challenge is tackling Greece’s chronic structural problems so as to improve the business environment, attract foreign investments, open up the economy and deregulate it, create an impartial and administratively efficient system of courts and law enforcement, remove excessive administrative impediments to business. There are plenty of reports from the OECD, World Bank and the World Economic Forum that contain a long list of measures to boost Greece’s competitiveness and make it more business friendly. It is hardly rocket science. The key is passing and, above all, implementing these measures.”
Marko Mrsnik, Senior Director, Sovereign Ratings at S&P Global Ratings, agrees: “We believe that the government policy announcements so far are a step in the right direction as far as the rating is concerned, provided that the commitment to the budgetary and other enhanced surveillance targets are fully complied with.”
He goes on to note that “in our view, the announced measures are aiming at reducing the tax burden in the economy. While they can be expected to contribute positively to private consumption dynamics and investment growth, it is in our view crucial to ensure full compliance with the primary surplus targets, especially in the context of the recent weakening of the budgetary position. As such the announced measures will likely require offsetting budgetary measures in order to meet the primary surplus target and prevent the erosion of the recent strong track record in budgetary performance. We believe that fulfilling the budgetary commitments without deviation from the budgetary targets would instill additional confidence as regards the direction of the economic policy implemented by the government and support the conditions favoring investment dynamics and economic growth.
For S&P’s Mrsnik, “the key to a faster economic recovery is a substantial reduction in the banking sector's nonperforming exposures, which would significantly enhance credit activity in the private sector and as a consequence crystalize the benefits of the substantial structural reforms Greece has undergone since 2010.
“Moreover, we believe that a faster economic recovery could result from further improvements in business environment, including an acceleration of the privatization process and government arrears clearance. We currently forecast 2.7 percent growth next year, however given the experience related to economic recoveries from the crisis of other countries in eurozone periphery, a faster resolution of the abovementioned challenges – especially with respect to the funding of the economy – could indeed further improve Greece’s economic outlook beyond our current forecast,” says Mrsnik.
For Vamvakidis, “Greece can indeed grow by 4 percent if pro-investment reforms are implemented, but many previous governments, before and after the crisis, failed in this area. I think the creditors are giving the new government the benefit of the doubt for now, to see if it can deliver.”
Teneo’s Piccoli views the 4 percent growth target as aspirational. “Investment is key and specifically FDI inflow is the main (if not only) hope of Greece for boosting investment. Public investment can hardly be increased due to budget constraints. Domestic investors suffer from weak profits and Greek banks are burdened with very large amounts of nonperforming assets, liming their lending ability. But Greece has always been terrible in attracting FDI. In the global FDI country attractiveness, Greece was in 48th position in 2018 among 109 countries. The growth outlook will be largely determined by Greece’s ability to attract more investments,” he notes.
Jakob Suwalski, chief analyst at Scope Ratings, places emphasis on public investment for growth to accelerate: “We expect Greece’s economic recovery to continue in 2019 and 2020. While the annual growth rate in 2018 came in at 1.9 percent – which confirms that the recovery is gaining some momentum – real GDP growth is forecast to reach around 2.2 percent in both 2019 and 2020, supported primarily by domestic demand. However, this forecast does not consider the possible effects of the measures announced by the new government. As an upside potential, investment is expected to rebound in 2019, if the public investment budget is executed in full. This may have a positive multiplier effect on corporate investment as well, as many private investment projects are related to public investments.”
He stresses that “a key factor for higher GDP growth will be the implementation of public investment projects of adequate quality. While the announced expansionary fiscal measures could provide an additional boost to domestic demand in the near term, investment financing through the banking system may face challenges, should the level of nonperforming loans remain high. In any case, the goal of 4 percent real GDP growth rates appear too optimistic in our view, not least given the global and European slowdown.”