Greece’s economic growth will be capped at not much more than 2% a year without a more substantial revival in investment, particularly from abroad, underlining the importance of the current government implementing its reform promises, Europe’s Scope Ratings GmbH says. The Greek economy has recovered over the past two years, though growth has ranged between 1.5% and 2.0%, undershooting the EU average. Scope expects real GDP growth of 1.9% this year, slightly increasing to around 2.0% in 2020.
“Since the election of the New Democracy government in July, we can see renewed optimism regarding economic recovery, reflected in rising bank deposits, growth in business loans and increased commercial and residential property prices,” Jakob Suwalski, analyst at Scope, notes.
Scope upgraded Greece’s long-term foreign – and local – currency issuer ratings, on the grounds of the country’s improved medium-term debt sustainability and the prospect of a stable, reform-oriented government.
“Recent and planned structural reforms have improved the long-term growth outlook, but Prime Minister Kyriakos Mitsotakis needs to continue to put emphasis on attracting investment and improving non-price competitiveness, not least because of the still elevated level of public debt in the years ahead,” Suwalski says. Scope expects Greece’s public debt to fall to around 140% of GDP by 2024 from 181.1% in 2018.
After years of prolonged austerity, Greece faces a significant investment gap – a lack of spending to upgrade equipment, infrastructure and intellectual property – with domestic investment amounting to just 10% of GDP, equivalent to half of pre-crisis levels. “This investment gap weighs on Greece’s economic potential, particularly given the crisis-induced burden on Greece’s banking sector, which ensures that the real economy is reliant on investment from abroad,” Suwalski says.
Greece faces three main economic challenges, one of which is reducing the high stock of non-performing loans which impairs banks’ capacity to extend credit and delays the recovery of investment and economic activity. The recently approved program of NPL securitizations, known as Hercules, will improve private-sector access to funding. An independently managed securitization vehicle will buy non-performing loans from the banks and sell notes to investors. The Greek state will provide a public guarantee for the senior, less risky notes of the securitization vehicle.
Secondly, the government needs to speed up privatization and other reforms to liberalize the economy, increase competition and attract FDI, as domestic savings are insufficient to provide the investment that the economy needs. “The signs are encouraging, with Mitsotakis moving ahead with privatizing the state-run gas company and sale of a 30% stake in Athens International Airport,” Suwalski says.
Thirdly, Greece needs to rebalance the economy towards a sustainable growth model that also benefits from exports. “The government has to move fast. While the ECB maintains its ultra-loose monetary policy, providing a supportive context for the government’s reforms, the European economic outlook has deteriorated, which could adversely affect Greece’s growth prospects,” Suwalski points out. Greece re-opened its on-the-run issue of 10-year government bonds, tapping the market for another €1.5 bln at a re-offer yield of 1.5%, significantly reduced from the original 3.875% coupon rate.