The Greek economy is expected to continue the outperformance of its EU partners that started in 1996, growing by about 4% in 2003 and 4.2% in 2004. By contrast, the European Commission (EC) forecasts GDP growth of 0.8% in 2003 and 2% in 2004 for the 15-member European Union as a whole and even lower rates of 0.4% and 1.8% for the eurozone.
There is, though, a downside to the Greek dynamism: its economy shows signs of fiscal slippage. This is causing concern about the country’s public debt and growth prospects, bankers and economists say. And the government’s strenuous efforts to redeploy privatization proceeds are meeting with mixed results.
Pillars of growth For now outperformance is based on the twin pillars of strong investment spending and healthy consumption growth. Backed by huge inflows from EU Structural Funds, preparations for the 2004 Olympic Games and the lowest interest rates in a generation, investment spending has become the main motor of growth. Generous wage rises and tax cuts have bolstered disposable income which, along with expanding consumer loans on the back of favourable interest rates, have accounted for real consumption growth rates in excess of 3%, further boosting the economy.
But high GDP growth rates have not helped Greece reduce its general government budget deficit this year and it may widen in 2004, mainly because of spending overruns related to the Olympics and the run-up to general elections scheduled for next spring.
In its 2004 draft budget, the government forecasts a general government budget deficit-to-GDP ratio of 1.4% this year. This compares unfavourably with an earlier target of 0.9% and 2002’s 1.2% actual deficit. Moreover, it projects a deficit of 1.2% of GDP in 2004 compared with an earlier target of 0.4%. Even these upwardly revised goals appear optimistic when compared with other forecasts. The EC expects this year’s budget deficit to amount to 1.7% of GDP, before swelling to 2.4% in 2004. Given the economy’s growth rate, that’s worrying
Private-sector economists warn that fiscal policy has been relaxed. “We forecast the budget deficit will end up around 2% of GDP this year and next. This is mainly the result of primary expenditure overshooting,” says George Provopoulos, chief economist at Alpha Bank. He argues that tax relief measures, spending on social programmes, the announced 30,000 new hirings in the public sector and pay rises point to permanent increases in primary spending for 2004 and after.
The EC estimates the cyclically adjusted general government budget deficit at 2.2% of GDP this year and 3.1% in 2004, compared with an average cyclically adjusted deficit-to-GDP ratio of 2.3% and 2.2% in the eurozone for these periods.
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Hardouvelis: target of much |
Gikas Hardouvelis, the prime minister’s economic adviser, strives to dispel alarm and takes a more positive view of long-term trends in Greek finances, saying the general government budget deficit is under control and attributing any overruns to the public funding of Olympic projects. “Greece made enormous progress in the past eight
years in consolidating its public finances and bringing the deficits down from over 10% of GDP to around 1% to 1.5%,” says Hardouvelis. “It gained credibility in its economic policy and is unwilling to lose it. The years 2003 and 2004 are special, however. These two years are absorbing most of the cost of the Olympic Games. The Games are financed through public funds and they are putting pressure on the budget.”
Hardouvelis admits that this pressure is evident in the primary surplus which is forecast to temporarily decline to 2.1% of GDP next year from earlier levels of 3% and higher.
He continues: “Thanks to low interest rates, however, the effect on the deficit will be small, bringing it to 1.4% of GDP in 2003 and 1.2% in 2004. The cost of the Olympic Games will be recouped after 2004, when many of the construction projects will be privatized. So the temporary dent in the deficits now automatically leads to temporary surpluses in the years 2005 and 2006. It follows that the target of much lower general government debt-to-GDP ratio will be achieved as well.”
Optimism not unanimous Other economists are less sanguine. Alpha’s Provopoulos, for example, argues that Greece will not be in a position to cut public investment spending to help meet the budget deficit target even after the Olympics because this would adversely affect GDP growth and might put the budget deficit-to-GDP and debt-to-GDP ratios on an upward course.
Greece has the third-largest debt-to-GDP ratio in the eurozone behind Italy and Belgium. According to the EC’s autumn forecasts, the general government debt will amount to 100.6% of GDP in 2003 compared with 104.7% in 2002. The EC forecasts Italy’s debt ratio at 106.4% and Belgium’s at 103.5% this year. The average debt-to-GDP ratio for the eurozone as a whole is 70.4% and it is 64.1% for the EU.
Greece’s failure to match the reduction in the annual budget deficit with the drop in the overall public debt in the past few years has called attention to below the line items, such as state loan guarantees to public corporations, military spending on equipment and others.
“If you takes a careful look, you will find out that these items, which do not appear in the budget, account for the discrepancy between the budget deficit and public debt reduction,” says an economist at a large local bank. “If Greece fails to rein in primary spending, reduce the huge deficits of state-owned corporations, such as OSE [the railways] and OASA [urban buses], restructure its ailing social security system and cut outlays for the items below the line, favourable public debt dynamics may be easily reversed, undermining economic growth.”
Privatization proceeds should have helped bring down the debt-to-GDP ratio faster. Now bankers worry that there is limited scope for raising large amounts from asset sales.
“Most of the assets that could have raised a good deal of money, such as OTE [telecoms], OPAP [lotteries] and DEH [electricity utility], have been sold,” says Alpha’s Provopoulos. “Greek privatization proceeds amounted to 12 percentage points of GDP in the past six years but their impact on public debt was much more muted.”
The government estimates it will rake in some e3 billion from privatizations by the end of this year and a similar amount next year. Still, only a small number of companies from a list of 20 slated for privatization have seen a change in management and/or ownership since most deals involve the sale only of minority equity stakes.
“In terms of allocation of resources and efficiency, it would have been better to sell majority stakes and hand over the management in state-controlled enterprises. In some cases though, such as DEH, this is more difficult because there is strong union resistance and questions abound about the country’s natural monopoly status,” says the economist from the large local bank.
There was a transfer of management along with the sale of a 40% stake in Hellenic Duty Free Shops (KAE) to a consortium of two local listed companies, Germanos and Folli Follie, in March. The government also achieved the sale of a 49% stake and the handover of management of Mont Parnes Casino to a consortium of Greek hotel and construction companies. Dairy company Agno was also sold by state-controlled Agricultural Bank in May. The government also announced the merger of state-controlled Hellenic Petroleum (ELPE) and refinery Petrola in the same month. Shareholders approved the merger in September, which will reduce the state’s equity in the new company to 43% from Other economists are less sanguine. Alpha’s Provopoulos, for example, argues that Greece will not be in a position to cut public investment spending to help meet the budget deficit target even after the Olympics because this would adversely affect GDP growth and might put the budget deficit-to-GDP and debt-to-GDP ratios on an upward course.
Greece has the third-largest debt-to-GDP ratio in the eurozone behind Italy and Belgium. According to the EC’s autumn forecasts, the general government debt will amount to 100.6% of GDP in 2003 compared with 104.7% in 2002. The EC forecasts Italy’s debt ratio at 106.4% and Belgium’s at 103.5% this year. The average debt-to-GDP ratio for the eurozone as a whole is 70.4% and it is 64.1% for the EU.
Greece’s failure to match the reduction in the annual budget deficit with the drop in the overall public debt in the past few years has called attention to below the line items, such as state loan guarantees to public corporations, military spending on equipment and others.
“If you takes a careful look, you will find out that these items, which do not appear in the budget, account for the discrepancy between the budget deficit and public debt reduction,” says an economist at a large local bank. “If Greece fails to rein in primary spending, reduce the huge deficits of state-owned corporations, such as OSE [the railways] and OASA [urban buses], restructure its ailing social security system and cut outlays for the items below the line, favourable public debt dynamics may be easily reversed, undermining economic growth.”
Privatization proceeds should have helped bring down the debt-to-GDP ratio faster. Now bankers worry that there is limited scope for raising large amounts from asset sales.
“Most of the assets that could have raised a good deal of money, such as OTE [telecoms], OPAP [lotteries] and DEH [electricity utility], have been sold,” says Alpha’s Provopoulos. “Greek privatization proceeds amounted to 12 percentage points of GDP in the past six years but their impact on public debt was much more muted.”
The government estimates it will rake in some e3 billion from privatizations by the end of this year and a similar amount next year. Still, only a small number of companies from a list of 20 slated for privatization have seen a change in management and/or ownership since most deals involve the sale only of minority equity stakes.
“In terms of allocation of resources and efficiency, it would have been better to sell majority stakes and hand over the management in state-controlled enterprises. In some cases though, such as DEH, this is more difficult because there is strong union resistance and questions abound about the country’s natural monopoly status,” says the economist from the large local bank.
There was a transfer of management along with the sale of a 40% stake in Hellenic Duty Free Shops (KAE) to a consortium of two local listed companies, Germanos and Folli Follie, in March. The government also achieved the sale of a 49% stake and the handover of management of Mont Parnes Casino to a consortium of Greek hotel and construction companies. Dairy company Agno was also sold by state-controlled Agricultural Bank in May. The government also announced the merger of state-controlled Hellenic Petroleum (ELPE) and refinery Petrola in the same month. Shareholders approved the merger in September, which will reduce the state’s equity in the new company to 43% from 68% previously at ELPE. The management, though, will remain in the state’s hands for another five years.
The state also sold a third equity tranche of 24.% in lottery operator OPAP to mostly foreign investors for some e720 million in July, lowering its stake to 51.15%. It also sold its 33.4% stake in Hellenic Exchanges to the country’s seven largest banks for some €88 million in the same month and collected around €55 million from the public offering of a 25.5% stake in the Piraeus Port Authority (OLP).
The government also netted e488 million from the sale of an 11% stake in National Bank of Greece, the country’s largest bank, and some €636 million from the sale of a 15.7% tranche in DEH. In both cases, foreign funds got the lion’s share, raising their stakes in both companies. They reportedly control more than 22% of National Bank.
The government has also announced its intention to sell a 20.3% stake in water company EYDAP to a strategic investor by the year-end and proceed with a public offering of a minority stake in Hellenic Tourism Properties (ETA) shortly. It is in discussions with Spain’s Natural Gas, the sole bidder, for the sale of a 35% stake in natural gas company DEPA and is interested in further reducing its equity participation in the Postal Savings Bank as well as in Emporiki Bank, where France’s Crédit Agricole has the right of first refusal. The post office, ELTA, is also slated for partial privatization and the government is seeking a strategic investor to buy Olympic Airlines, a spin-off and successor to debt-laden Olympic Airways. The state also wants to privatize 100% of Corfu Casino.
The Athens stock market composite index was up about 23.5% for the year to mid-November 2003, closing at 2,161.33 on November 13. Net inflows from abroad have been supportive, with foreign private and institutional investors owning 30% of listed companies at the end of October, up from 28.6% at the end of 2002. Their presence is more pronounced in blue chips, accounting for 38.4% of the constituents of the large capitalization FTSE/ASE-20 index, their stake being valued at e17.5 billion.
“The Greek stock market is more closely linked to major foreign bourses than ever before,” says Apostolos Tamvakakis, deputy governor at National Bank of Greece. “The degree of correlation between the Greek stock market indices and other major stock market indices has increased substantially in the past few months.”
Effect of foreign funds
Nickos Karamouzis, deputy CEO at EFG Eurobank Ergasias, concurs, pointing out that foreign funds have almost doubled their holdings in heavyweight Greek banks. “The increased presence of foreign funds helps explain to a large extent the higher correlation between Athens and other foreign bourses,” he says.
Harris Makkas, CEO at ING Piraeus Asset Management, suggests inflows from abroad would have been even bigger if foreign fund managers had more large Greek firms to invest in. “The size of the market and its listed firms is relatively small,” he says. “M&A activity has been a disappointment since there is a lot of protection and little incentive to go ahead with M&As.”
The increased correlation with other world stock indices and the small size of most Greek firms does not, though, remove the scope for outperformance by the Athens stock exchange.
“If one believes the US and major EU bourses will go up in the next 12 months, one should expect the Athens bourse to follow suit. Barring unexpected geopolitical events, the major stock markets should perform well in the next 12 months,” says Tamvakakis. “I think elections and the Olympics will prove secondary drivers for the local market. Historically, the Athens bourse gains when we have elections. Given its high beta, this means the Athens bourse could outperform the other bourses by up to 20% in the next 12 months or so.”
Despite some concerns about increasing fiscal imbalances, Karamouzis is also cautiously optimistic about the bourse, predicting Greek corporate earnings, especially among banks, will grow faster than expected this year and will continue to do so at least until the Olympics. “Initiatives for structural reforms by the new government will also have a positive impact on the bourse and positive surprises from M&As should not be ruled out,” he says.
Elections may be the key for accelerating structural reforms, encouraging risk-taking and unleashing private-sector investments and the potential of the equity markets.
“The picture looks constructive given the international backdrop,” says ING Piraeus Asset Management’s Makkas, noting that a lot of bad news, such as the fiscal slippage and the overhang from private placements, has been factored in stock prices, whereas the prospect of elections, the 2004 Olympics and even the aftermath of general elections could provide impetus.
Government bonds dampener
Things may look promising for the Athens bourse but it is not quite the same picture for Greek government bonds, which largely track moves in German bonds. The local market, which has average daily turnover of e2.8 billion, is heavily influenced by foreign players. Roughly half of Greek bonds are in the hands of non-locals and 13 out of 18 primary dealers are foreign banks.
“Government bonds are in a cyclical bear market,” says Makkas. “Even if Greece gets upgraded by international rating agencies, it will not help a lot.”
The 10-year Greek-German Bund yield gap shrank to 10 basis points earlier this year before settling around 14bp in November from 23bp at the end of 2002. On November 18, however, it reached an all-time low of 8bp.
Greece’s long-term debt was upgraded to A+ by Standard and Poor’s in June 2003 and A+ by Fitch last month. It has been rated A1 by Moody’s since November 2002. Still, the country has the lowest credit rating in the EU.
Although Greece’s debt financing schedule for 2004 has not yet been announced , it is expected to be somewhat lower than in 2003.
“The year 2003 was exceptional because the Hellenic Republic had to borrow a high amount of some €30 billion because of some €10.7 billion-worth of expiring seven-year FRNs,” says Francis Dassyras, head of funding at the Public Debt Management Agency (PDMA). “The high borrowing needs coincided with historically low interest rates, allowing for the refinancing of old FRNs with cheaper fixed coupon bonds.”
Dassyras points out that the expired FRNs paid 12-month Euribor plus 140bp on average. The last FRN issues, worth a total of € 3.3 billion, mature next year.
