Hidden growth cards

In a bid to restore business and investor confidence in its ability to reform the Greek economy and lay the foundations for high, sustainable GDP growth rates into the future, the government appears determined to tackle certain issues long regarded locally as sacred cows. Even though these efforts have been applauded by equity investors, bankers and businessmen, it looks as if they have failed to shake the downbeat mood prevalent among a number of bankers and businessmen. With economic growth surprisingly on the upside in the first quarter, one may have to start wondering what would have to go right to make them change their pessimistic outlook. Although foreign and domestic equity institutional investors have welcomed the government’s determination to push through reforms, admittedly enhancing their capital gains by propping up the Athens general stock index, one does not see the same kind of optimism gaining ground among many bankers and businessmen. Even though they all agree that the reforms are long overdue and should have taken place years ago, they do not think the resulting impetus will be strong enough to reverse the underlying trend of deterioration. To support their thesis, they point to a number of firms in different sectors facing a liquidity squeeze and the weak growth prospects evident in the eurozone, with neighboring Italy in a recession and Germany still suffering from anemic GDP growth rates. «Things are not good and will get worse in coming quarters and years,» the head of a private sector bank told us on Friday, pointing to the announcement by Radio Korassidi, the big appliances retailer, that it is seeking protection from creditors. «If all of them start popping up, I am wondering whether banks can cope.» There is no doubt that the conservative government’s hand in pushing for structural reforms is expected to be strengthened after winning last night’s vote of confidence in Parliament, the offspring of a political tactical mistake by the Socialists. This, along with a number of polls that show the majority of the population favors the same employment status for employees in the private and public sectors, should make its decisions less dependent on considerations of political cost. Of course, the benefits of economic reform usually accrue in the medium to long term and most of the time are not visible in the short run. But looking ahead one may find a few bright spots which could keep economic growth above 3.0 percent, helping absorb some of the costs of restructuring. One should not rule out this possibility after the pleasant GDP growth surprise in the first quarter and the containment of the inflationary spike to levels below 3.4 percent year-on-year after the one-percentage point rise in VAT (value-added tax) and the increase in excise taxes on tobacco and alcoholic beverages starting in April. It is noted that the Greek economy defied earlier gloomy forecasts to advance by a revised 3.5 percent year-on-year in the first quarter, aided by strong growth in private consumption and an improvement in the external sector attributed to the lack of payments related to the Olympics in 2004. Taking this into account, as well as signs of improvement in tourism, the Greek economy looks set at this point to deliver an annual rate in excess of 3.0 percent this year compared with a consensus estimate of 1.6 percent growth in the eurozone. Of course, one may predict a sharper slowdown in the fourth quarter after the impact of tourism has been registered over the summer months. It is certainly a possibility, but two other factors, unaccounted for, may step in at that point. FDI boosters First is the launch of some large foreign direct investments (FDIs), amounting to more than 600 million euros and perhaps more than 1 billion euros at maturity, frozen for years due to bureaucratic and other obstacles. It is reasonable to expect, government officials say, that some of these will start being implemented in the fall and be put into higher gear in 2006. These investments, mostly in the tourism and energy sectors, are expected to have a multiplier effect on the economy in the years to come but have not been seriously taken into account as they have been bogged down for years. The development of large tourist resorts in areas such as Crete are going to pave the way for the realization of other projects, however smaller in scale, in the wider area and attract thousands of tourists. In addition, since some of these resorts will be advertised in the foreign press, they will in reality increase Greece’s advertising budget on tourism. Another factor that may turn out to be a bonanza for the Greek economy and public finances is the launch of public-private partnerships (PPPs) and private finance initiatives (PFIs). Although these can take different forms, they concern the investment of private and sometimes public sector funds toward the provision of improved public services and the better management of state assets. Through them, the state can save billions of euros from its public investment budget, lowering its budget deficit and public debt in turn, while providing higher quality services and upgraded facilities to its citizens, attracting foreign direct investment and, in general, getting better value for money invested. The faster full liberalization of some markets, such as energy, is also possible within this context as is the creation of new jobs and the expertise to be gained by local companies and the banks financing the projects. The latter can prove valuable when going to bid for similar projects abroad. All in all, there are some factors, not sufficiently considered in economic projections, that could play a decisive role in tipping the balance in favor of faster GDP growth even in the short run. These factors could help absorb a good deal of the social and economic costs of the structural reforms likely to be taken by the government, paving the way for a change in perception and sentiment among bankers and businessmen.