ECONOMY

Economy’s prospects hinge on implementing reforms

The Greek economy’s prospects appear to be slightly improving, according to the latest quarterly report by the Foundation for Economic and Industrial Research (IOBE). Nonetheless, the future course of the economy depends heavily on the implementation of reforms for which the government has already legislated, the report, published yesterday, points out. The report estimates that GDP growth in 2006 will be only slightly lower than 2005 (3.5 percent, compared to 3.7 percent), still considerably higher than the eurozone average. The motor of growth will be the strong domestic demand and the continuing dynamic growth of private consumption, increasingly financed through bank loans. On investments, the report is ambivalent, with their prospects dependent on the implementation of reforms. Depending on this outcome, we may see either a small growth or the continuation of a drop begun immediately after the 2004 Olympics. Another bright spot is the gradual improvement in the business climate, although the improvement is uneven: Business people are significantly more upbeat than consumers. The improvement in state revenue seen from the end of last year and in January 2006 makes the government’s ambitious goal to reduce the 2006 budget deficit below 3 percent of GDP – in accordance with EU guidelines – more likely. However, primary spending is still rising quickly, placing a heavy burden on revenue collection in order to attain the budget deficit goal. As the report points out, revenue growth can be unpredictable because it depends on the economy’s overall performance. That is why it warns that a steady, irreversible improvement in the fiscal situation can be achieved only through a steady decline in public spending. This, in turn, calls for broad reforms that will have to be implemented over several years. Crucial in this medium-term reform strategy will be social security reform. However, so far, the government seems to treat that one as a hot potato to be passed along to the next government. It has called for an «open-ended» dialogue on the subject, making sure that it will be so open-ended and leisurely that it will not be concluded before the next general election, due by April 2008. Despite this delay, the report notes that structural reforms have been accelerated. This, in turn, has a positive effect on the business climate. Thus, despite some reservations, the IOBE report believes that this year will not only see the implementation of reforms but also the first positive results of the reforms. There is, however, the caveat that «the government’s commitment to this report is subject to uncertainties connected to policy choices which, the closer we get to national elections, are more likely to be affected by likely opposition to the reforms.» The IOBE report also includes the results of the Global Entrepreneurship Survey, which covers 35 countries. The survey showed a significant increase last year of people willing to start businesses because of the opportunities involved. In 2003, about 40 percent of the Greek entrepreneurs surveyed said they had become entrepreneurs because of the lack of other options, such as the availability of a lifetime job in the public sector. That number was reduced to 14 percent last year. Eurobank upbeat on stock market outlook Ongoing changes in the Greek business landscape will intensify in the months ahead, with more privatizations, mergers and buyouts of domestic firms by foreign groups, a senior banker said yesterday. Presenting a written analysis on the prospects for the Greek economy in 2006, EFG Eurobank’s Deputy Managing Director Nikolaos Karamouzis said the changes will add vigor to the Greek stock market, helping the Athens bourse general index rise to about 4,500 points by the end of the year – from about 4,200 today and against an original estimate of 4,300 points. Karamouzis said the sharp gains of the Greek stock market in recent months are almost exclusively accounted for by foreign institutional investors, given the still subdued presence of their domestic counterparts and retail investors. Their strong interest is due to Greece’s high economic growth rate, the profitability of listed firms – projected to rise 19 percent on average in 2006 – and their strong presence in the growing markets of Southeastern Europe. The profitability of banks, in particular, which are attracting the lion’s share of foreign interest in the Greek stock market, is projected to rise by an average of 25 percent. This interest is also fueled by developments on the privatization front, mergers and buyouts, Karamouzis said. Eurobank’s economic adviser, Gikas Hardouvelis, argued that the prospects for the Greek economy are improving in line with a significant rise in public revenues. He predicted that the budget deficit will be cut to around 3 percent of gross domestic product, the European Union-mandated ceiling. Eurobank analysts predict that the European Central Bank will hike its key rate by a quarter percentage point on Thursday, and that it will rise to 3 percent by the end of the year.