Greece: Risk Assessment
Country Risk Rating
Business Climate Rating
- Support from the international financial community; possible debt relief
- World leader in maritime transport
- Tourist destination
- Very high public debt
- Very poor quality bank portfolio; high level of non-performing loans (48% in the first quarter of 2018)
- Weak public institutions; high levels of tax evasion
- Small industrial base; low-tech exports (food, chemicals, metals, refined oil)
- Social tensions fuelled by fiscal restraint and massive unemployment
Continued Evidence of Improvement
Following Greece’s exit from its third bailout plan, the economic upturn continues. Growth strengthened in 2018 driven by robust household consumption and a positive impact from net exports. Economic growth is expected to remain buoyant in 2019. The labour market is likely to stay on its positive trend, with an expected decline in the unemployment rate, which should support household consumption. In addition, wage increases and lower inflation are projected to contribute further to purchasing power. Investment, which grew at a sluggish pace in 2018, is set to strengthen, but will probably rebound by less than anticipated. The construction sector should, however, hold up positively, driven by the growth in tourism activities. Renewed confidence, an improving business environment, and tax incentives – including lower corporate and dividend taxes – should fuel growth in fixed capital. Nevertheless, the banking system’s weaknesses inherited from the crisis and more restrictive financing conditions than in the rest of the eurozone will likely continue to limit SME investments. Although access to bank credit has improved and deposits have stabilised, the level of non-performing loans remains high. To meet the targets set by the Bank of Greece and the European Central Bank’s single supervisory mechanism, the largest banks have promised to clean up their balance sheets by reducing their exposure to non-performing loans (NPEs). They are thus expected to lower their NPE ratio to 35% in 2019 by gradually offloading their portfolios of non-performing loans. Finally, exports, particularly of services, are likely to remain on track in 2019. Despite this, net exports are expected to make a smaller contribution to growth than in 2018 as a result of the rebound in imports, driven by higher consumption and investment.
Balanced Public Accounts and Primary Surpluses in Line with Commitments
Greece finally emerged from its third assistance programme in August 2018. Fiscal consolidation efforts undertaken since 2015 have enabled the country to gradually get the public accounts back into balance and rebuild the credibility of its fiscal policies. For the second year running, the government balance was in surplus and the primary surplus remained in line with the objectives set by the adjustment plan. Although Greece will no longer be subject to the plan, it agreed at the Eurogroup summit in June 2018 to continue and complete the reforms adopted under the European Stability Mechanism (ESM) programme in exchange for debt relief. The country will therefore be required to accept enhanced monitoring by the ESM and the European Commission. Although the medium-term fiscal objectives have not yet been defined, in October 2018 Greece sent the Commission its 2019 budget, which was accepted in its first draft. The 2019 budget plans to maintain the fiscal surplus while implementing a number of measures other than those of the adjustment plan. On the expenditure side, the pension cuts that were supposed to take effect in January 2019are to be replaced by a freeze on pensions until 2022. The contribution to social security for self-employed workers will be reduced, and measures to facilitate homeownership for low-income households will be implemented. Revenues are expected to benefit from the favorable economic situation and better tax collection, which will allow the authorities to reduce taxes on labor, business, and real estate. The primary surplus is projected to remain in line with the Commission’s target of 3.5%, but the slight increase in debt service will weigh on the government’s surplus. Despite the large primary surplus, public debt increased in 2018 due to the disbursement of €15 billion under the Emergency Safeguard Mechanism in August 2018. Largely concessional (73% held by international donors), the debt is expected to decrease in 2019. In order to ensure debt sustainability, European lenders and the government have agreed on a package of measures including deferral of interest and depreciation as well as a ten-year extension on European Financial Stability Fund loans.
A Difficult Election Year for Syriza
As the second government led by Alexis Tsipras, a coalition between radical left-wing party Syriza and the right-wing ANEL party, enters its last year before the October 2019 election, the Prime Minister carried out a final cabinet reshuffle in August 2018 to prepare for the upcoming election. Despite a budget pledging social measures and the country’s exit from the third European aid plan, Syriza is losing ground in the polls and now sits second behind the right-wing New Democracy Party. It is therefore very likely that the radical left-wing coalition will not be re-elected once its term ends. The European elections in May 2019 should provide a good insight into electoral trends ahead of the autumn elections.