Yannis Stournaras: Prospects of the Greek economy after six years
of adjustment
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the EU-Arab World
Summit "Partners for Growth and Development", Athens, 3 November 2016.
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It is a great pleasure for me to be here with you today and have the opportunity to share my
thoughts on the prospects of the Greek economy after six years of economic adjustment. I will
focus on four issues: First, the achievements made so far during the difficult years of economic
adjustment. the missteps and delays in the adjustment process. recent
Second, Third,
developments and future challenges and prospects. And fourth, I will highlight the main reasons
why Greek assets constitute a prime investment opportunity.
1. Economic adjustment over the past six years
Since the beginning of the sovereign debt crisis, six years ago, Greece has come a long way in
adjusting its fiscal and external imbalances and has implemented a bold programme of structural
reforms.
First, there has been unprecedented fiscal consolidation. The fiscal consolidation
effort contributed to an improvement in the general government primary balance as a
percentage of GDP by more than 11 percentage points over the period 2009-2015, despite
the deepening recession. In fact, in the period 2013-2015 Greece managed to maintain
small primary surpluses (as defined in the programme) in the general government budget for
the first time since 2001. Adjusting for the effect of the recession, the improvement in the
"structural" primary balance over the period 2009-2015 reached 17 percentage points of
potential GDP; twice as much as the adjustment in other Member States that were under
EU-IMF programmes.
Second, competitiveness has been restored. The cumulative loss in labour cost
competitiveness vis-à-vis our trading partners recorded between 2000 and 2009 has been
fully recovered.
This development reflects the effect of structural reforms in the labour market, which allow
for greater flexibility in the wage bargaining process, as well as the impact of the sharp rise
in unemployment on labour costs.
Third, the external adjustment has been significant. The current account posed a small
surplus in 2015 (0.1% of GDP). This marks a significant turnaround of the current account
balance by about 15 percentage points of GDP since 2008. Adjustment has come primarily
from a decline in imports of goods, particularly in 2009, when world trade collapsed due to
the global recession. However, since 2010, exports, excluding shipping, have contributed
significantly to the improvement.
Exports of goods in real terms have actually rebounded in line with those of our euro area peers
and the shares of goods exports have increased significantly vis-à-vis non-EU countries. On the
other hand, exports of services in real terms have underperformed primarily due to the weakness
of the shipping sector. This was driven by domestic economic uncertainty and the imposition of
capital controls, as well as global factors, such as the weaker growth of global trade, lower
commodity prices and a supply overhang in the global shipping sector.
In more detail, the share of exports in GDP increased from about 19% in 2009 to close to 30% in
2015, with about 2/3 of this increase stemming from goods exports and 1/3 from services
exports and, in particular, receipts from tourism. It should be noted that goods exports stood at
about 14% of GDP in 2015 compared with 7.5% of GDP in 2009.
Fourth, the policy agenda has included bold structural reforms. A series of structural
reforms have been implemented in the labour and product markets, as well as in public
administration. These reforms are expected to boost the growth potential of the Greek
economy in the long-term through higher productivity and employment growth. According to
the OECD, the reforms implemented in the period 2010-2014 are expected to raise real
GDP over a 10-year-horizon by about 5.6%. Adding the reforms currently being implemented
or planned under the ESM programme, the overall increase in real GDP comes to about
13.4% over a 10-year-period. However, this estimate is a lower bound in the sense that
additional reforms, for example improving the judiciary system, strengthening bankruptcy
regulations, modernising the public administration and resolving the issue of non-performing
exposures (NPEs) cannot easily be quantified. In-house work by the Bank of Greece points
to similar estimates with the main effect coming from higher total factor productivity (TFP)
growth.
Fifth, the rebalancing of the economy has been remarkable. The restructuring of the
Greek economy towards a new, extrovert, growth model based on tradable goods and
services and a higher share of exports in GDP is already underway. In more detail, the
relative prices of tradable goods and services rose by about 10% in the period 2010-2015,
making their production more profitable. As a result, the share of tradable goods and
services in the private economy has risen in recent years. For example, in gross value
added terms, the relative size of the tradable sectors grew by approximately 12% in the
period 2010-2015 in volume terms and by about 24% in nominal terms, while in employment
terms it grew by around 8%. This development is attributed both to the structural reforms
implemented so far and to the fact that tradable export-oriented sectors have gone through a
milder recession and have thereby gradually gained some ground in terms of volume and
employment shares.
An additional aspect worth highlighting is that on account of the decline in domestic demand and
the scaling back of construction in Greece, a great number of dynamic construction companies
expanded their businesses abroad (Middle East, Balkans) transforming a previously thought to
be a non-tradable activity into an internationally tradable one.
Going forward, structural reforms and improved financing and liquidity in the economy are
expected to speed up the restructuring of the economy in favour of tradable goods and services.
Over
Sixth, bank recapitalization and considerable consolidation have taken place.
the past few years, the landscape of the banking system has changed significantly with the
number of banks having been reduced through mergers, takeovers and resolutions. Today
the system comprises four core banks and a number of smaller ones. The banking system,
following successive rounds of recapitalization involving significant private sector
involvement and the implementation of restructuring plans, is now well-placed to address the
major challenge posed by the high stock of non-performing exposures (NPEs). Effectively
managing NPEs is key to the recovery of credit growth and to the restructuring of
businesses and sectors in the real economy.
2. Missteps and delays in the adjustment process
However, despite the huge efforts to avert default and address imbalances, Greece remains
under an adjustment programme, unlike Cyprus, Ireland and Portugal, which have already
completed their respective programmes, even though they entered these programmes later than
Greece did.
This lagging behind can be attributed to several factors, including: lack of ownership of the
necessary reforms and lack of commitment, by part of the political system, to correct past
errors, the anti-bailout rhetoric, rivalry and failure to reach an understanding among political
parties, and the various - small and large - vested interests that have resisted reform.
Meanwhile, the fact that our European partners have yet to deliver on their commitment to
provide further debt relief, as stated in the Eurogroup decisions made as far back as in
November 2012 (and iterated most recently in May 2016), and the threat of default and euro area
exit brandished against Greece by some of our partners whenever negotiations seemed to stall,
even on just technical matters, has weighed heavily on market sentiment, further fueling
uncertainty and negatively affecting the economic climate in Greece.
Certain miscalculations in the design of the economic adjustment programmes could also
explain Greece's lagging behind vis - a - vis the other countries, previously under programmes.
Given the size of the fiscal imbalances back in May 2010, when the first economic adjustment
programme was initiated, more emphasis was placed on fiscal consolidation, pension reform,
streamlining budgetary procedures, increasing fiscal transparency, as well as financial sector
restructuring. Less emphasis was given on growth-enhancing labour market reforms and, most
notably, on product and services market reforms and reorganizing the public sector. In addition,
growth forecasts were too optimistic and fiscal multipliers turned out to be higher than initially
anticipated. As a result, the economy was trapped in a vicious circle of austerity, recession,
rising unemployment and private debt overhang.
Despite the recouping of losses in international competitiveness, exports have underperformed
relative to what could have been anticipated based on historical correlations. This can in part be
explained by the lack of financing, higher long-term borrowing costs, increased uncertainty, as
well as the higher tax burden, which slows or even halts progress towards restoring overall
competitiveness. In addition, this can also be attributed to a number of inherent structural
weaknesses that hamper the international market penetration of Greek products and involve
noncost aspects such as product quality, protected designation of origin and branding, red tape, etc.
Hence, despite the improvement in structural competitiveness over the period 2013-2014
(according to a number of indices compiled by the OECD, the World Bank, and the World
Economic Forum), Greece still ranks at the lower end of the advanced economies, and progress
has stalled or even reversed slightly in recent years.
3. Recent developments and prospects
In spite of the delays and missteps, progress in correcting past mistakes has been remarkable.
For example, the new ESM programme in place since August 2015 builds on the successes of
the first two programmes (i.e. the correction of fiscal and external imbalances and the
improvement of labour cost competitiveness) and aims at prioritizing reforms that will increase
potential growth in the medium-to-long term, i.e. reforms in product markets, public
administration, institutions and the business environment, bank recapitalization and resolution of
NPEs.
Building on the progress achieved so far, the completion of the first review of the ESM
programme had a positive effect on confidence and liquidity and is expected to boost economic
activity in the second half of 2016.
Most importantly, the reinstatement of the waiver for Greek government bonds enabled Greek
banks to obtain low-cost financing from the European Central Bank (ECB). This, along with the
gradual dissipation of uncertainty, the stabilization of private sector deposits and the progress
achieved in restructuring and recapitalizing Greek banks, has contributed to the lowering of the
emergency liquidity assistance (ELA) ceiling for Greek banks by about €40 billion since July
2015, bringing it down to €51.1 billion as of today.
These developments are expected over the medium term to encourage a return of deposits to
the Greek banking system, which will allow an easing and, ultimately, the lifting of capital
controls. Coupled with a more effective management of non-performing loans, this will contribute
to reducing borrowing costs and will gradually increase the lending capacity of Greek banks, with
positive effects on the financing, hence the growth performance, of the Greek economy.
The gradual economic recovery is already reflected in the performance of several key
indicators of economic activity, such as: industrial production, retail sales, dependent
employment flows in the private sector, and real exports of goods.
The current forecasts of the Bank of Greece point to a recovery starting from the second half
of 2016 and continuing through 2017 and 2018. Specifically, GDP is projected to post a small
decline of 0.3% in 2016, but then to grow by 2.5% and 3% in 2017 and 2018 respectively. These
projections assume that the programme implementation will remain on track, the relevant loan
tranches will be disbursed on time, and that the monetary policy of the ECB will continue to be
accommodative.
Nevertheless, of the Greek economy remain.
risks to the outlook Delays in the
implementation of reforms and privatizations envisaged in the programme would dampen
economic growth, thereby refueling uncertainty, undermining confidence and weakening the
prospects of a definitive exit from the crisis.
Meanwhile, there also are
risks and uncertainties regarding the course of the global
economy, stemming, among other things, from protectionist voices and actions around the
world, the implementation of a hard Brexit, and a likely exacerbation of the refugee crisis. These
risks could slow down the recovery of the Greek economy, both through negative effects on
tourism and trade and through a slower-than-expected decline in yields on Greek government
bonds due to the risk aversion from global investors.
The containment of the abovementioned risks and the realization of the positive
of the Greek economy
prospects require a number of tangible and concerted actions.
These actions, which will ensure the successful conclusion of the ESM programme and the
return to financial markets, comprise the following:
1st Stepping up the pace of reforms and privatizations. The government should remain
committed to the timely implementation of the structural reforms and privatizations that have
been agreed upon with the Institutions. Particular emphasis should be placed on:
simplifying investment licensing procedures, reducing administrative burden on businesses
and facilitating competition,
opening up the remaining regulated professions and network industries,
scaling up the privatization and public real estate programme, and improving its governance,
modernizing and strengthening public administration,
enhancing judicial efficiency and speeding up court proceedings.
In this context, the on-going second review should be completed without undue delays, so as to
solidify the recovery prospects and the return to robust positive growth in 2017.
2nd Tackling the high stock of non-performing exposures (NPEs). Alongside the structural
reforms, using idle public property to attract foreign direct investment through appropriate land
use legislation and speeding up privatization, there is an urgent need to
address the private
debt overhang problem, in order to facilitate the recovery through a stronger pick-up in lending.
On the one hand, the high stock of NPEs reduces bank profitability and thus constrains the
supply of credit, which primarily affects bank-dependent SMEs. On the other hand, high NPEs
delay corporate restructuring and thus thwart the ability of viable firms to finance new investment
projects.
Tackling the high stock of non-performing loans is currently the greatest challenge facing the
Greek banking system and the Greek economy. Greece has the second highest NPE ratio in
Europe (after Cyprus), with non-performing exposures at the end of the first half of 2016 reaching
45.1% of total exposures or €108.7 billion.
A number of initiatives are underway with the goal of setting up an accelerated and efficient
framework for private debt resolution. These initiatives, amongst others, include:
the development of a secondary market for both performing and non-performing loans;
the establishment of an enhanced framework for out-of-court workouts and pre-bankruptcy
procedures, as well as the overhaul of bankruptcy legislation;
the recently revised Code of Conduct for banks for the transparent, effective and, where
appropriate, flexible treatment of cooperating borrowers facing difficulties in servicing their
debt obligations;
amendments to legislation to ensure the cooperation of old shareholders in the restructuring
of the underlying businesses;
the launch of a comprehensive monitoring framework in relation to banks' non-performing
exposure resolution activities, and, finally,
a series of targets and key performance indicators that aim at reducing overall
nonperforming exposures by 40% by the end of 2019.
On their part, banks need to pursue a more active policy for NPE management, by promoting
long-term solutions and multi-creditor workouts, as well as focusing on the restructuring of viable
businesses. These lines of action, coupled with the economy's path out of the recession and
back to growth, should bring about a stabilization and, subsequently, a decline in the NPE ratio.
3rd Addressing the large public debt overhang The commitment of our European partners in
May 2016 to take action in order to ensure the sustainability of public debt in the short and
medium-to-long term, reaffirmed their November 2012 Eurogroup decision and is a positive
step forward. However, the envisaged long-term public debt management measures have not
been specified yet. Urgent action is warranted on the specification and quantification of the
foreseen debt relief measures. This will enhance the credibility and acceptance of the policies
pursued, thereby helping to further consolidate confidence, strengthen economic recovery, lower
the tax burden and facilitate the return to financial markets after the end of the
programme.
4th Easing and eventually lifting remaining capital controls. The gradual relaxation of capital
controls, along with improvements in confidence and liquidity, are expected to contribute to the
normalization of economic conditions by facilitating both enterprises and individuals in their
transactions.
4. Final remarks: investment needs and opportunities in Greece
Greece is poised to return to economic and financial normality and to shift to a new, extrovert and
sustainable growth model, based on tradable goods and services. To this end, the improvements
in cost competitiveness of recent years provide considerable room for higher exports in goods
and services in the near future.
However, new investment will be needed in order to strengthen the export base of extrovert firms.
The further opening-up to international trade, the participation in global value chains and the
closer trade links with countries and businesses with cutting-edge technology internationally will
enable the adoption of new technologies by export firms and their diffusion across the Greek
economy, strengthening its long-term growth prospects.
New investment, by facilitating innovation and the introduction of new technologies, will both
broaden the export base and improve the quality of Greek exports, raising total factor productivity
of the Greek economy. In turn, this will make the reduction in the external deficit sustainable and
increase potential output over the medium-to-long term.
Therefore, Greece needs a substantial amount of foreign direct investment (FDI). The policy
changes made in recent years are conducive to growth, thus creating profitable
investment opportunities. For example, the implementation of reforms in the labour, product
and services markets and in public administration, the enhancement of financial stability, the
utilization of public real estate, the stepping-up of the privatization programme, and efforts to
tackle the private and public debt overhang problem improve confidence and rebuild financial
markets' trust. Hence, they generate positive growth prospects and help attract foreign direct
investment.
In this context, prospective investors will also benefit from the presence of
high-skilled human
capital by OECD standards and a vast pool of idle labour resources. According to the Global
Competitiveness Report 2016-2017 of the World Economic Forum, Greece ranks quite high in
terms of workforce education and skills (38th out of 138), in higher education and training (45th),
in the availability of scientists and engineers (10th), in technological readiness (42nd). Although, a
large number of high-skilled youth have moved to other EU countries since the outbreak of the
crisis, the opening-up of new jobs in Greece as growth returns and investment picks up will
contribute to the repatriation of many of them, further improving the skill and knowledge content
of the labour force.
Furthermore, the new investment incentives law (L.4399/2016) provides a clear framework
and a stable business environment for the commencement of a variety of individual investment
projects. The new law envisages several aid schemes, for example: tax exemption, subsidies for
the acquisition of new machinery and other equipment, subsidy of the cost of created
employment, a stable corporate income tax rate for a period of 12 years from the completion of
the investment project. In order to qualify for the aid schemes, the investment projects should
entail initial investment, for example, investment in buildings, machinery, intangible assets, and
should meet certain conditions (i.e. creation of new production units, expansion of existing
production units' capacity, etc.).
On top of the above, the recent conclusion of a number of major privatization projects - such as
the privatization of the port of Piraeus, which will upgrade its role as a shipping hub, the sale of
14 regional airports in key tourist destination islands and cities, the sale and real estate
development of the old Athens Airport facilities at Hellinikon, as well as the participation of private
investors in the recapitalization of Greek banks - constitute an important vote of confidence
from major foreign investors, who decided to position themselves early on the Greek market, in
anticipation of even better future prospects for the Greek economy.
Going beyond recent policy changes, Greece provides significant investment opportunities on
account of its geographical location in Southeast Europe and its close proximity to the Middle
East and the Arab world. There are potential gains in the trade, logistics, transport and energy
sectors as Greece aspires to become a transport and energy hub in future years, which implies
significant infrastructure, networks and other investment needs.
Moreover, significant investment opportunities exist in as Greece is a major tourist
tourism
destination, and at the same time it has a sizeable public real estate property that is available for
utilization by private investors in order to expand capacity and quality of tourism infrastructure.
Last but not least, Greece is both a member of the European Union and the euro area.
Currency redenomination issues are off the table for good. Consequently, prospective non-EU
investors will benefit from gaining access to the and will enjoy a stable
EU Single Market
institutional environment, investor protection, as well as access to a sound banking and
financial system.
Therefore, Greek assets in general can be regarded as undervalued, which, on account of all the
recent policy changes, the improvement of labour cost competitiveness and the country's
competitive advantages, have great potential to perform much better in the future, generating
substantial profits for new investors.
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In conclusion, I would like to emphasize once again that economic adjustment and structural
improvements over the past six years have rendered Greece more business-friendly and have
opened up significant investment opportunities, in particular for those who will position
themselves early in the Greek economy. At the same time, foreign direct investment is also
essential for Greece, because it will set in motion a virtuous circle signaling investor confidence
in Greece's future prospects, a definite exit from the crisis and a return to sustainable and
extrovert economic growth.
Sources:
Bank of Greece (2016), Annual Report 2015, February.
Bank of Greece (2016), Monetary Policy 2015-2016, June.
OECD (2016), Greece, OECD Economic Surveys, March.
Stournaras, Y. (2016), "The Greek Economy: Developments, Opportunities and Prospects".
Speech at the Federation of Industries of Northern Greece, Thessaloniki, 13 May 2016.
Stournaras, Y. (2016), "Greece and the Eurozone at a crossroads". Speech at an event
organised by the Young Presidents' Organization in Athens, 23 September 2016.