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
- Business climate set to improve under new government
- Very high public debt
- Very poor quality bank portfolio; high level of non-performing loans
- 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
The recovery’s momentum continues
In 2020, growth will continue to accelerate, but is unlikely to reach the levels projected by the new government (close to 3%). The tourism boom has been instrumental for resurrecting the Greek economy: the number of yearly visitors has now surpassed 30 million, and revenue from travel receipts increased by 13.6% in the first half of 2019 relative to the same period last year, reflecting higher individual expenditures. The country is now shifting to domestically driven growth. In 2019 and 2020, virtually the entire growth contribution will come from consumption and investment, as the contribution of net exports becomes neutral. Notably, private investment is projected to yet again grow near the 10% mark. Household consumption will grow at 0.8%, supported by rising wages and declining unemployment, which will nonetheless remain in excess of 17%. Absent productivity growth, rising wages will harm competitiveness. FDI (1.5% of GDP) will be the main source of financing for capital investment, as banks remain too encumbered by bad assets to finance the economy. At around 35%, the level of non-performing loans (NPLs) remains the largest in the Eurozone by an order of magnitude, and so private credit growth remains negative (-10% year/year in September 2019). Intricate links persist between the financial health of banks and the State: exposure to the sovereign represents 180% of tier 1 capital, contingent guarantees amount to 5% of GDP, the State holds significant stakes in the three largest banks. Therefore, the threat of the sovereign-bank doom loop is still latent. Nonetheless, thanks to the Hercules bad bank scheme, banks will be able to offload €30 billion of the €75 billion NPL stock.
The new government doubles down on fiscal consolidation
Athens aims to repeat the outstanding fiscal performances of recent years by encouraging investment and private spending through tax cuts, hoping that the growth of the tax base will more than compensate the decrease in marginal rates. The planned tax cuts concern the corporate tax rate (29% to 24%), the income tax for poor earners (22% to 9% for annual incomes under €10,000) and the dividend withholding tax (10% to 5%). In addition, the solidarity contribution (a 10% add-on to the tax rate for high earners) and the business activity duty (a licensing fee for self-entrepreneurs) are to be scrapped altogether. These measures will amount to about €1 billion in stimulus, €600 million for corporations and €400 million for households. Judicial initiatives to overturn public salaries and pension reforms constitute a low-probability, high-stakes fiscal risk. If the courts rule against the state, one-off retroactive payments could amount to nearly 4.5% of GDP. Tax collection will remain a significant challenge: thanks to a weak repayment culture, the VAT gap (the difference between expected and collected revenue) is of 33%. In order to enlarge the tax base, the 2020 budget will raise the minimum share of electronic payments required for tax credits and introduce real-estate taxation based on market prices. The gradual stabilization of the economy permitted the lifting of the last remaining crisis-era capital controls in September. After receding slightly in 2019 due to the record tourism performance and shipping services, the current account deficit will rebound slightly as imports rise with domestic demand. The structural trade deficit is explained by a weakly diversified and low value added manufacturing sector. The government is projected to meet its demanding fiscal targets (3.5% primary surplus) and thus reduce public debt, most of which is official in nature.
An ambitious pro-growth agenda following snap elections
On July 7, 2019, center-right New Democracy won a landslide victory (39.8% of the vote) over incumbent Alexis Tsipras’ leftist Syriza Party (31.5%). Its leader, Kyriakos Mitsotakis, holds an outright majority with 158 out of 300 seats in Parliament, as the winner receives 50 extra seats. Mitsotakis aims to resuscitate private investment through a decidedly pro-business reform agenda. A major milestone will be the launch of the Hellinikon urban regeneration project. Valued at €8 billion, the project aims to develop an area three times the size of Monaco around the former Athens international airport. Other planned projects include the Skouries and Olympias mines in the north (€1 billion), the development of the Piraeus port area (€800 million), and smaller scale pharmaceutical investments totaling €460 million. After 28 years, an agreement was reached over the Macedonia naming dispute, and so Greece will stop blocking North Macedonia’s initiatives in multilateral instances (EU and NATO).