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Today, the rating agency Moody’s raised Greece’s credit rating to Ba3, with a stable outlook, from B1 with a stable outlook.
The house estimates that the Greek economy will contract 9% this year, but expects a strong recovery in 2021. It estimates that the country will register an average growth rate of around 3.5% in the medium term.
As the house points out, the main reasons that led to the current improvement in the country’s debt are the following:
1. Ongoing reforms support sustainable enhancement of institutional strength and have already made tangible progress in areas such as tax administration, compliance and the fight against corruption. In Moody’s opinion, the risk of reversing these significant changes is low.
2. The country’s development prospects in the coming years are positive despite the short-term negative effects of the pandemic, especially in the tourism sector. According to the Chamber, the Greek economy will benefit from continued efforts to improve the investment climate in combination with very large inflows of European funds earmarked for recovery. The favorable growth prospects, combined with a return to a prudent fiscal position, will lead to a gradual reversal of the trend in public debt. Furthermore, it notes that Greece benefits from its very favorable debt structure.
The firm adds that the stable outlook reflects its view that it will take some time for the benefits of the reforms to be fully integrated and visible. He also highlighted that the banking sector, despite the progress made last year, still requires vigorous action to improve the quality of its assets, which remains weak.
Strong implementation of reforms
More specifically, the Chamber notes that since the last assessment in March 2019, the momentum for the implementation of structural reforms has remained strong. Progress is still being made on the pending reform commitments agreed between the previous government and the Eurogroup in June 2018. Progress based on the achievements of Greece’s third adjustment program between 2015 and 2018, which placed significant emphasis on institutional reforms and governance reforms.
Improvements in Greece’s institutions and governance are visible in areas such as independent revenue management, which translates into higher tax revenue and better compliance. The continuous digitization of the public administration and the social security system has a positive impact on tax compliance, as well as on the efficiency of the public administration and contributes to the improvement of the business environment. The government has taken important steps towards a more systematic approach to addressing high level of NPLs through the Hercules Program, as well as a new insolvency framework that is expected to take effect early next year. Reforms in the judiciary continue, along with new measures to align the quality and professionalism of public administration with its European peers. Overall, these reforms are helping to address the factors of Greece’s economic and debt crisis of the last decade.
The recovery of funds and the improvement of the investment climate strengthen the country’s prospects
Moody’s notes that despite the significant economic contraction resulting from the impact of the coronavirus pandemic, it expects the country’s strong investment prospects to support the recovery and substantially improve Greece’s medium-term growth prospects.
As he points out, the disbursement of EU funds to support growth, of which Greece will be the euro area’s biggest beneficiary relative to GDP, will provide significant support for both growth and investment.
While Moody’s expects the Greek economy to contract around 9% in 2020, a strong recovery is expected in 2021, adding that the most important thing about Greece’s credit profile is that growth is expected to average around 3.5% in the medium term.
The Chamber notes that Greece will receive 32 billion euros (17% of GDP in 2019) from the EU Recovery Fund, of which 60% will be in the form of grants. These funds offer significant potential to restore Greece’s low investment, the lowest in the EU so far and a key constraint on the pre-coronavirus recovery trend, and to boost potential growth.
Furthermore, the Chamber notes that Greece also receives significant funds from other sources, such as the EU Structural Funds, the European Bank for Reconstruction and Development and the European Investment Bank, which will also support further investment. The inclusion of Greece in the ECB’s quantitative easing program helps to ensure favorable financing conditions not only for the government but also for Greek banks and the economy as a whole.
According to the house, in the past, Greece at times did not implement public investment plans and private investment was weak. A key reform that has been implemented in the recent past is a new investment licensing framework, which, among other things, significantly reduces the administrative burden for new investments and removes key obstacles, in addition to the development of digital tools. The first results are visible: according to the World Bank’s Doing Business surveys, starting a business is now more efficient in Greece than anywhere else in the EU. Foreign direct investment last year reached its highest level since at least 2002, partly due to several successful privatizations and most recently in the real estate sector. The recent decision by Microsoft Corporation to build three data centers in Greece is an indication that it has enhanced the country’s attractiveness for foreign investment. The government is also close to reviewing the public procurement law, which will be important if the country is to make full use of available EU recovery resources.
Moody’s predicts that Greece’s debt ratio will rise significantly this year, to about 200% of GDP, before declining again starting next year and after the expected economic recovery. However, he notes that the debt ratio is less important than in other countries, given the very long duration of the debt structure and the significant and repeated debt relief provided by Greece’s creditors in the euro area.
The house notes that the banking sector remains very weak, characterized by low-quality assets and a large proportion of lower-quality capital in the form of deferred tax credits. NPLs remain very high, at 36.7% as of June 2020, and are likely to increase given the economic impact of the crisis.
However, even here the improvements are obvious. NPEs decreased by 15.7 billion euros in the twelve months to June 2020. The “Hercules” program, which has been in operation since December 2019, is an important step in clearing the banks’ balance sheets of non-performing assets.
The government recognizes that more is needed and has stated that it will likely proceed with an additional proposal from the Bank of Greece, which will cover a larger amount of non-performing loans and will also aim to address large amounts of deferred tax assets on bank balance sheets . .
Why the stable outlook
The stable outlook balances Moody’s view that while the improvements seen in recent years are unlikely to be reversed, it will take several years to integrate and make visible the benefits of institutional reform and governance.
The rating agency also notes that the pandemic has delayed the completion of some reforms. The resurgence of the pandemic in Europe, despite the more favorable performance of Greece during the “first wave”, could create a further delay in the measures to be implemented during 2021.
Statement from the Minister of Finance, Mr. Christos Staikouras
“The credit rating agency Moody’s improved the credit quality of our country.
This is an extremely positive development for Greece and its economy.
In fact, the assessment was conducted under conditions of unprecedented recession in the world economy and individual national economies, as well as the high uncertainty that the pandemic has brought.
This development is evidence of increased confidence in the country and the Government, for the management of the current crisis, its reform initiatives and the prospects for the Greek economy.
For our part, we continue the effort with faith in the forces of the country, plan, calm and determination, to make our country stronger, its economy more productive and our society more just and cohesive ”.
More in a while …
