VIEWS AMONG GREEK bankers about the prospects for the Greek economy are mixed. Yiannis Papathanassiou, a conservative New Democracy party parliament deputy and former chairman of the Hellenic Chamber of Commerce, is particularly pessimistic. He reckons that if the situation is allowed to drift Greece will experience a significant economic slowdown and serious fiscal problems after 2004 should it fail to push ahead with much-needed structural reforms.
Papathanassiou, who is widely expected to hold a key economic ministry in a conservative administration, says Greece cannot count on EU transfers alone if it is to grow and warns of more losses in international competitiveness and higher unemployment if policy inertia takes hold.
“EU inflows and investment spending linked to the 2004 Olympics account for the largest part of GDP growth in the last few years,” Papathanassiou says. “I fully share the concerns about economic growth and public finances after 2004 because past EU transfers have not been used efficiently so as to enhance the country’s competitiveness, while funds from the third Community Support Framework (CSF) will be more difficult to absorb given the stricter project selection criteria and the need to adhere to more precise timetables.”
Concern over Games bill Papathanassiou says Greece stands to benefit from a well-organized Olympic Games in 2004 but will also have to foot the bill while not being able to count on a good deal of money that has already been collected by the government via privatization certificates and the securitization of future revenues from the third CSF, the state lottery and other entities.
He is in favour of cutting primary spending as a percentage of GDP to allow for corporate tax cuts to boost competitiveness and rein in inflation. “Interest expenses have fallen some six percentage points due to lower interest rates in the last few years but this is not reflected in the budget and public debt,” he says. “Cutting primary spending is necessary in the same way deregulation and the liberalization of certain markets, such as energy and transport, are for bringing down inflation to the EU average. The bottom line is a smaller, better state but Greece needs a strategy to make it happen.”
From a macroeconomic point of view the Greek economy is likely to outpace average eurozone growth again in 2003 but its biggest challenge will be the imposition of fiscal discipline and control over public debt dynamics in a pre-election year while pushing forward with structural reforms.
Preliminary first-quarter GDP figures paint a rosy picture, indicating that Greece is on its away to meeting and even exceeding the official real GDP growth target of 3.8% in 2003. This follows three consecutive years of strong growth rates ranging from 4% to 4.3%, underpinned by robust investment spending, partly financed by EU structural funds. In contrast to the situation in Germany, the Netherlands and Italy, Greece managed to expand by 4.3% year on year in the first quarter, banking on a 7.9% rise in investment spending and 3.6% in consumption.
“I expect the economy to grow by about 4% this year despite an unfavourable international environment, and inflation to ease below 3% at the year-end,” says Yannis Stournaras, chairman of Emporiki Bank.
Persistent worries
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“I expect the general government budget deficit to approach 2% of GDP this year. It is not bad compared with France or Germany but Greece has a much higher public debt ratio,” says George Provopoulos, chief economist at Alpha Bank.
The revised general government budget deficit eased to 1.2% of GDP in 2002 from 1.4% in 2001 on the heels of a 0.8 percentage point reduction in interest expenses as a percentage of GDP, partly offset by a 0.6 point decline in the primary budget surplus. It is projected to fall further to 0.9% of GDP this year but some doubt this can be attained. General elections are likely next spring – there is speculation that they might be called earlier. The run-up to elections in Greece is traditionally characterized by fiscal relaxation.
First-quarter figures showed a significant deterioration in the central government budget deficit, part of the general government. But officials attribute it to special factors expected to fade away. Total expenditures rose 18.2% year on year and revenues by just 1.7%, pushing the borrowing requirement to e4.3 billion.
“First-quarter budget figures were contaminated by special factors and were expected. If one takes these into account, the picture is a lot better,” says Gikas Hardouvelis, economic adviser to prime minister Costas Simitis. He points to one-off revenues from the introduction of euro notes and coins in the first quarter of 2002 that augmented that quarter’s revenue base, making a comparison with this year’s figures rather unfavourable.
Still, some do not agree with this relatively rosy view, stressing the lack of satisfactory control on expenditures. “The fiscal situation is worrisome,” says Miranda Xafa, economic adviser to Piraeus Bank and the former conservative prime minister Constantinos Mitsotakis. “It mainly stems from the inability or unwillingness of the government to control expenditures. The central government budget has ballooned in the first quarter despite the fact that not all so-called capital transfers – in effect subsidies to state-controlled corporations – are included in expenditures.”
Xafa is also critical of the government’s decision to give a tax arrears amnesty to professionals, saying that the move points to the difficulties in keeping the budget deficit under control and sends the wrong message to taxpayers. Instead, she favours closing down Olympic Airways and privatizing other state-controlled companies such as EAB (Hellenic Aerospace Industry), ELVO and Pyrkal.
The thorny issue of pension reform is linked to progress on fiscal consolidation. Although almost everybody admits that the current pay-as-you go system is in dire straits on the back of adverse demographics and the ensuing forecast steep rise in pension expenditure, few dare to call openly for drastic reforms.
Xafa believes the current pension system is doomed even after last year’s reforms, mainly intended to ensure adequate financing for the country’s largest IKA fund, without significant cuts in benefits. She proposes indexing pension increases to inflation instead of wage growth because “there is no reason pensioners should benefit from productivity improvements”, extending the retirement age and reducing the replacement ratio.
Although Greece’s fiscal balances may not be in the best possible shape, they are not the worst in the eurozone. The same does not hold true Greek public debt, which, with Italy’s and Belgium’s, heads the eurozone’s league table. Indeed, following Eurostat’s upward revision of Greek public debt last year to include proceeds from securitization, convertible bonds and privatization certificates (prometoha), the debt-to-GDP ratio was restated to 106.2% of GDP in 2000 and 107% in 2001. It fell to 104.9% in 2002 – the eurozone average is 69.1% – and is projected to fall to 100.2% this year.
The mismatch between satisfactory progress in budget deficit reduction amid lower interest rates, fast GDP growth and insufficient debt reduction is largely a result of off-balance-sheet items, such as state loan guarantees to public entities.
The government aims to collect some e3 billion from privatizations this year. It has already announced the sale of a 25% equity stake in state-controlled soccer pools and lottery group OPAP in June, which might fetch between e500 million and e600 million. It also wants to sell another tranche in Public Power Corporation next autumn after selling a 13.2% equity stake in the company last December. DEPA (the natural gas company), Hellenic Post and the Piraeus Port Authority (OLP) are also slated for partial privatization.
The government also wants to privatize Hellenic Tourist Properties, Hellenic Exchanges Holding, General Bank and Galileo Hellas, Olympic Airways’ electronic ticket subsidiary. It has also reportedly mediated to facilitate talks for a stock swap between Petrola and Hellenic Petroleum Corporation (ELPE), both listed on the Athens bourse, after plans for the sale of a 23% stake in ELPE to the Petrola-LUKoil joint venture fell through.
Sotiris Theofanis, the president and CEO of OLP, says: “We have made the necessary preparations and we are awaiting the green light from the government to proceed.” Theofanis headed the Salonica Port Authority into the Athens bourse.
Alpha Bank’s Provopoulos warns of pitfalls ahead. He also argues that privatization proceeds, some 10 percentage points of GDP in the past few years, should have brought public debt much lower.
“A possible pick-up in interest rates and a reduction in EU transfers in the future, leading to an economic slowdown, could have a destabilizing effect on public debt dynamics,” Provopoulos says.
Concerns abound about the sustainability of high growth rates after 2004 in the absence of investments related to the Olympic Games and Greece’s ability to take full advantage of EU transfers from the third CSF. Greece’s failure to attract foreign direct investment is another worry. According to preliminary figures from the Greek central bank, FDI fell dramatically to just e53.4 million in 2002 compared with e1.8 billion in 2001 and e1.2 billion in 2000.
Hardouvelis is more optimistic, arguing that public investment spending will continue even after 2004 and will be redirected to more productive uses. “If the 2004 Olympic Games go well, then Greek products and services will be more recognizable, as Australia’s experience shows,” he says. “Moreover, EU structural funds will continue to flow until 2008 and beyond, albeit at lower rates.”
Emporiki Bank’s Stournaras broadly agrees with Hardouvelis, saying years of strong investment spending should yield permanent productivity gains, boosting exports. Still, businessmen like Odysseas Kyriakopoulos, the president of the Federation of Greek Industries, appear sceptical and have even added EU enlargement to the list of worries. They argue that new members will compete with Greece for EU structural funds and stress that some of them rank higher than Greece in global economic competitiveness studies.
“EU enlargement is both a potential threat and a challenge,” says Provopoulos, adding that Greece cannot compete with these countries in labour-intensive industries and should therefore focus on such areas as tourism.
Paul Mylonas, chief economist at National Bank of Greece, points out that “the impact of EU enlargement on Greek exports has already been felt to a large extent since this process started several years ago”. He notes, however, that it is difficult to assess its overall impact. “On the one hand, there are many export and business opportunities to be exploited in the new members, and indeed exports to central Europe have increased markedly. On the other hand, Greece will have to compete with these countries for markets in the core EU countries,” he says. “Regarding future EU transfers, Greece will receive less as most new entrants have a lower per capita income and the EU budget will not be increased accordingly.”
He says improving international competitiveness is paramount to attaining long-term growth and real economic convergence with the EU average. “This requires bringing down inflation, investing to increase the quality of Greek exports, especially in services, and reducing various structural rigidities in the economy. A more judicious use of CSF funds would also be useful,” Mylonas adds.
Asked if the inflation differential between Greece and the EU could be explained by Greece’s higher inflation in non-tradeables, he says studies have shown that price increases in non-tradeables explain some 0.7 percentage points out of the total 1.5 point inflation differential.
The chief economist of National Bank adds that CSF funds have helped boost the domestic economy but that it should not become addicted to them. “They should not have the effect of the Dutch disease, leading to a real appreciation of the exchange rate and a loss of competitiveness in traditional export sectors,” he says.
Greece’s exports of goods and services have increased their share from 5.3% of its trading partners’ markets in 1990 to 6.5% in 2001. This points to an increase in competitiveness although the real effective exchange rate appreciated by about 7% in the same period as a result of Greece’s higher inflation compared with trading partners, according to National Bank estimates. This may be indicative of higher-quality exports as well as of changes in their composition.
Exports up but not enough The figures indeed reveal that the share of exports in Greek GDP rose from 13% in the early 1980s to 24% in 2001, largely as a result of the rising share of services, mainly tourism, in total exports. Services accounted for 62% of exports in 2001 compared with 35% in the 1980s. Even so, the ratio of Greek exports to GDP remains well below the average of other EU countries.
In addition, economists point out that Greek goods exports to Balkan and central and eastern European markets have been growing in the past 10 years or so. Lower transportation costs and consumer patterns help explain the growth.
Still, the steep rise of the euro has contributed further to the country’s real effective exchange rate, prompting concerns about an even wider trade and current account deficit, estimated at 6% of GDP or higher.
Hardouvelis, though, says the increase in the current account deficit in the past three years is wrongly interpreted as a sign of lack of competitiveness. “Any level above 3% is transitory,” he says. “Well-known academics attribute it to the higher growth in the country vis-à-vis the rest of Europe and the increase in investment as well as the opening up of capital markets, which allowed Greek households to borrow more easily and at lower rates, thus reducing the overall savings rate. This mismatch between investment and savings is the fundamental driver of the current account deficit. But this mismatch is what boosts economic activity and growth.”
The Greek economy’s relative buoyancy is reflected in its capital markets. After three consecutive years of steep losses and a disappointing start this year, the Athens stock exchange has rebounded on easing geopolitical uncertainties and better-than-expected first-quarter results by heavyweight banks, fuelling hopes of stabilization and even recovery ahead.
The Athens bourse is expected to broadly track major foreign markets for the rest of the year, while senior executives point out the need for a new story to attract foreign investors. The Athens general share index fell 16% to 1467.3 points in the year to March 31 but rebounded close to last year’s close of 1748.42 in mid May.
“The Athens stock exchange is currently being affected by four factors,” says Nicholas Karamouzis, deputy CEO at EFG Eurobank Ergasias. “First, the international economic environment. Second, corporate fundamentals and earnings in particular. Third, structural economic reforms and fourth, the prospect of general elections.”
He notes that shares of Greek blue chips are more closely correlated with their European peers but it is difficult to predict how the latter will perform in the rest of the year. He says it is positive that many listed companies opted for balance-sheet cleansing and focused on increasing operating profits in the past couple of years. With regard to heavyweight banks, he says: “Unless the stock exchange collapses, we have seen the worst in bank profits and this should be evident in first-half financial results.”
With general elections just a year or so away, many market participants are concerned about their impact on public finances and equities. “A protracted pre-election period is usually associated with loose fiscal policy in Greece and this is not good for equities,” says George Kofinakos, head of Citigroup Global Markets Greece.
But Karamouzis sees things a bit differently. “The prospect of elections should benefit the Athens bourse because no matter who wins, the socialists or the conservatives, market participants expect the new government to act fast on structural reforms in the first six months,” he says, expressing the hope that “fiscal policy will not be relaxed in the run-up to general elections”.
A story for foreign investors Alexandros Sarrigeorgiou, CEO of the Allianz Group in Greece, says the Athens stock exchange has to look beyond the 2004 Olympics and EU fund transfers and present a new story to foreign investors. “The Greek stock exchange is a small market with a problematic image. It should have a specific story to attract foreign investor interest,” he says. The 2004 Olympic Games and the EU transfers are old stories. The new story could be about real economic convergence with the rest of the EU driven by aggressive structural reforms. These reforms, though, are unlikely to be undertaken in the next 12 months or so because of the political cycle.”
He says no government would have been willing or able to push ahead with aggressive reforms in the labour market or the social security system during a pre-election period.
Sarrigeorgiou believes the stock exchange could also benefit from the normalization of relations with Turkey. “Greece can reap the benefit of a peace dividend if relations with Turkey get completely normalized. This will lead to a reduction in defence spending, relieving the budget,” he says.
What about the bourse’s prospect this year? “I am neutral on the Greek equity market,” he says. “I expect volatility with some upward bias by year-end. “Foreign investors can be attracted by company fundamentals and a new country story but luring in the Greek retail investor depends on psychology.”
Citigroup’s Kofinakos is more upbeat about the bourse’s prospects this year. “The Athens stock exchange trades at a discount to major developed markets on forecast 2003 and 2004 earnings and offers a higher dividend yield,” he says. “This combination bodes well for outperformance. We believe share prices at current levels with the general index around 1730 points incorporate a lot of bad news.”
Greek equities may have been struggling but government bonds have been having a better run. The 10-year Greek-German Bund yield spread narrowed significantly to around 17 basis points in May.
“I believe the 10-year Greek-Bund yield spread has tightened a lot this year and this leaves little room to tighten even more,” says EFG’s Karamouzis. “It would take a credit upgrade for the 10-year spread to narrow further significantly, but this requires structural reforms and fiscal consolidation – not likely in an election year.”
Allianz’s Sarrigeorgiou says the tightening of the 10-year Greek-German Bund yield reflects Greece’s progress as well as Germany’s problems. “Greek long-dated bonds follow Bunds but what really concerns me is the low level of yields, not Greece’s per se,” he says, adding that Greek long bonds appear to be rich and vulnerable to a correction, making him prefer the short-to-medium-term duration.
Francis Dassyras, head of funding at the Public Debt Management Agency (PDMA), also notes that “the 10-year spread tightened from 28 basis points at the start of the year to about 16 basis points by mid-May, which means the 10-year Greek bond traded at similar levels with Italy although Greece is rated two notches below Italy.”
Italy’s long-term government debt is rated AA by Standard & Poor’s and Aa2 by Moody’s, whereas Greece is assigned a rating of A by S&P and A1 by Moody’s.
Greece borrowed quite heavily in the first months of the year, a strategy explained by Dassyras. “We borrowed around e20.5 billion by mid-May compared to a gross borrowing target of e29 billion to e30 billion for the year,” he says. “The redemption profile of the debt along with geopolitical uncertainties explains why we decided to borrow this sum in the first months of the year.”
Dassyras pointed out that around e19 billion-worth of this issuance was roll-overs, mainly of expiring old FRNs, and the rest strategic issues. Greece issued e1.25 billion of a HICP inflation-linked bond maturing in 2025 and a Sfr500 million ($387 million) issue carrying a coupon of 2.125% and expiring in 2009.
Government bonds have been dominating the local fixed-income market for years but may find a new competitor in asset-backed securities, although expectations about the future of a local corporate bond market have cooled. Municipals may come to life as well.
“I believe the asset-backed securities market will develop,” says EFG’s Karamouzis. “Just looking at mortgage and consumer loans, credit cards gives you an idea of its potential. On the other hand, it will be more difficult for the corporate bond market to have depth and be liquid when companies can borrow at much lower interest rates from banks than through corporate bonds.”
Sarrigeorgiou appears to share the same view about the local corporate bond market. “There is not a strong, liquid market for corporate bonds in Europe. It is even worse in Greece, but I am 100% in favour of its development.”
In addition to asset-backed securities and corporate bonds, a few Greek cities seem to be preparing to issue municipal bonds, following the lead of Amaroussion, which will host the main Olympic events. Amaroussion was the first Greek city to seek a credit rating from an international agency and made a municipal bond issue several years ago. S&P assigns it a BBB- long-term issuer credit rating, citing growing tax and fee revenues from its corporations.
Athens deputy mayor Theodore Skylakakis says: “We are considering proceeding with a municipal bond issue to finance our investment programme. The City of Athens is in the process of selecting a foreign investment bank to provide bridge financing and advise it on funding alternatives, including a municipal bond.” He expects Athens to pick a bank soon, and most likely seek a rating.
