MARKO MRSNIK, SENIOR DIRECTOR OF SOVEREIGN RATINGS, S&P GLOBAL RATINGS

Reforms helped restore country’s competitiveness

reforms-helped-restore-countrys-competitiveness

reforms-helped-restore-countrys-competitiveness0We currently expect a strong rebound of 7.2% in 2021 and about 5% and 4.4.% respectively in 2022 and 2023. Over the next three years, we expect Greece’s economic growth will surpass the eurozone average, including in real GDP per capita terms.

Strong economic performance has been fueled mainly by domestic demand and exports in 2021. On a sectoral basis, the data confirm an accelerating economic recovery. Tourism accounts for an estimated 10% of total employment, and just under 7% of gross value added. In 2019, Greece’s net tourism exports hit an all-time high of €15.4 billion, equivalent to 8.4% of GDP. We don’t project the return of net tourism earnings to these elevated pre-pandemic levels until 2023-24. However, earnings in the sector have been rapidly improving and the outlook for next year is positive, given the planned significant increase in international arrivals next year. In August 2021, external travel receipts already reached 75% of August 2019 levels. Although some progress has been made in extending the duration of the high season, the third quarter typically represents just under two-thirds of full-year tourism earnings.

Activity in construction and manufacturing has been recovering quickly, with the manufacturing purchasing managers’ index having reached levels not seen since the late 1990s. The economic recovery – which is also reflected in the declining unemployment rate – has been supported by the government’s 2020 fiscal measures, such as the reduction in personal income tax for low earners, reduced property taxes, and a revised schedule for paying tax arrears. In our view, these measures have boosted households’ disposable income and the recovery in domestic demand.

We believe that the Greek economy will benefit substantially from the available facilities under the Next Generation EU (NGEU) fund. Greece is set to receive grants of €17.8 billion by 2026 and loans of €12.7 billion, without considering loans available via the support to mitigate unemployment risks in an emergency for employment support or the European Stability Mechanism’s pandemic credit line. More than one-third of the allocation is planned for the country’s green transition, almost one-quarter for digitalization, and the remainder for supporting private investment, labor market policies, healthcare, and public administration, including tax administration and judiciary. We believe that, if used efficiently, these funds could fast-track the structural improvements in the economy and will contribute to stronger growth during our forecast horizon.

As a result, investment activity is set to improve in 2021, alongside increasing net foreign direct investment. The privatization process slowed in 2020 due to the pandemic, but the government accelerated it in 2021, facilitating planned private sector-led projects.

Mainly because of the impact of the stronger-than-expected economic recovery on government revenue and spending, we currently estimate a budget deficit in 2021 of 9.1% of GDP, compared with a government estimate of 10%. In 2022, we expect the withdrawal of most discretionary budgetary measures will mean the deficit falls sharply to 3.1% of GDP, compared to the government target of 3.6%. The difference in both years is explained by our higher economic growth forecast of 7.2% in 2021 and 5% in 2022, compared to the government’s 6.1% and 4.5%, respectively. As a result, we expect government debt to decline to about 195% of GDP in 2021, and to about 186% next year.

Greece has over the past decade undergone a very significant transformation supported by increasing predictability of policies and implementation of structural economic and budgetary reforms, which has been reflected in a steady improvement in its creditworthiness.

These reforms have among others resulted in the restoration of Greece’s competitiveness. In this context it is worth pointing out that the share of exported goods and services (excluding shipping services) has doubled, compared with only 19% of GDP in 2009. The country has made progress in improving the business environment. The government is reducing undue administrative burdens (especially to speed up investment), tackling inefficiencies in the judiciary, setting up the cadastral agency and completing cadastral mapping by mid-year 2022, and advancing the digital transformation, particularly in the services sector. This includes embedding digital skills training in primary and secondary education, as well as digitalizing public administration. Furthermore, the government has adopted vocational training and higher education reforms to improve labor market outcomes. We believe successful reforms would likely result in productivity gains, enhance macroeconomic outcomes, and improve the sovereign’s debt servicing ability in the medium to long term. In our view, the funds available under the NGEU agreement could serve as a catalyst for such reforms, with previous and ongoing structural initiatives likely to boost economic growth.

The budgetary position has also significantly improved due to a large structural budgetary consolidation, leading to sizeable primary budget surpluses. These structural budgetary efforts are also reflected in our expectation of a rapid decline in the budget deficit over the coming years which will allow the government debt-to-GDP ratio to resume its decline following the adverse impact of the pandemic.

Despite its still large debt burden, the structure of which is characterized by a large proportion of official loans, Greece’s annual debt servicing costs are now much lower – averaging about 1.4% while the weighted-average residual maturity of central government debt stood at about 19 years at mid-year 2021. We expect this and future debt management operations, including with respect to the bilateral loans (GLF) and the remaining IMF loans, will help alleviate the government’s interest burden, even considering the material increase in government debt due to the economic and budgetary impact of the pandemic. As a result, Greece entered the pandemic with substantial fiscal buffers – including large liquid assets estimated at 16% of GDP in 2021.

In addition, with respect to the eurozone, the situation today is diametrically opposed to that a decade ago. The European Central Bank’s decision last year to consider Greek government bonds eligible for its pandemic emergency purchase program (PEPP) and as collateral in repurchase operations are key for Greece’s access to funding at affordable rates, in our view. At the same time, as mentioned earlier, the Greek economy benefits substantially from available facilities under the Next Generation EU agreement which were unavailable during the debt crisis.

Downside risks are mainly related to the evolution of the pandemic, with respect to potential new Covid-19 variants, and their impact on the economy, especially tourism and implications for the nonperforming exposures in the banking sector. Lower-than-planned absorption of the NGEU grants would also limit economic performance, which we currently don’t expect however.

On the whole, we believe that with respect to the sovereign rating the balance of risks is a positive one, with a scope for a stronger-than-expected economic performance and further decline in nonperforming exposures, given the ongoing and future likely disposals, including via the government’s new Hercules II facility.

Our positive outlook on Greece’s ratings signifies that we could raise our ratings on Greece within the next 6-12 months if its economic recovery is faster than we currently project and stronger than that of its peers. The ratings upside could also hinge on a material improvement in budgetary performance, coupled with a marked reduction of NPEs in Greece’s banking system. The continuation of structural reforms alongside a strong economic rebound and improved budgetary performance is therefore key. In this scenario, NPEs in Greece’s impaired banking system would also shrink significantly, which would benefit monetary transmission, in our view.