MACROECONOMIC REFORMS

 

The economy of Greece is the 51st largest in the world with a nominal gross domestic product (GDP) of €179 billion annually. It is also the 55th largest in the world by purchasing power parity, at €270 billion annually. As of 2017, Greece is the seventeenth-largest economy in the 28-member European Union. Greece's GDP per capita was €18,000 at nominal value and $29,123 at purchasing power parity in 2018. For the first time in 10 years, economic activity returned with solid growth at 1.5% in 2017. Indeed, this is the first time Greece has achieved 6 consecutive quarters with positive GDP change since 2006. GDP growth is mainly export-driven, as improved external competitiveness combined with solid external demand has underpinned export growth. GDP growth is estimated at 2.1% and around 2% in 2018 and this year respectively.

 

The unemployment rate declined further to 18.3% in the third quarter of 2018, remaining on a downward path, the lowest level since August 2011. On the fiscal front, the 2018 general government primary surplus target of 3.5% was outperformed by a strong margin (4%) and according to the 2019 budget, it is projected to reach 3.6% of GDP. A set of expansionary fiscal measures amounting to 0.5% of GDP will take effect in 2019, corresponding to the first loosening in fiscal policy since 2009. This expansion will be financed by the recurring part of the fiscal overperformance in the period 2016-2018 (0.5% of GDP, on average) and is expected to provide an analogous impulse to domestic demand. A modest set of expansionary measures will take effect in 2019, being the first loosening in fiscal policy since 2009. The expansion will be financed by the recurring part of the fiscal overperformance in the period 2016-2018 also supporting domestic demand.

 

The government is committed to the implementation of growth-enhancing reforms, including administrative reforms and speeding up of judicial procedures. Reviving domestic and foreign investment is crucial to supporting the country’s economic recovery. The privatisation agenda can play an important role as a major opportunity to attract FDI in key sectors of the economy, such as transport, energy, logistics and tourism. These efforts are expected to enhance the country’s credibility in the eyes of international capital markets and credit rating agencies, making the investment grade within reach. Perhaps the services sector is the ripest opportunity for expansion and growth, not just through M&A, but via less expensive joint ventures and partnerships

 

Recently, Greece has raised €2.5 billion issuing a 5-year government bond at a yield of 3.6% and an annual fixed coupon for investors of 3.45%. This was the country's first attempt to tap the international money markets after the country's exit from the third bailout programme last August. The €10 billion issue was four times oversubscribed with foreign investors’ participation exceeding 85%. As the Greek government yield curve has been rebuilt, its slope has been steepened for the first time since 2015, implying improved investor perceptions about the outlook of the Greek economy. In short, Greece is already in the markets with the only exception of the 10-year benchmark new issue. Since the start of the year the trading volume in the secondary securities market has been raised substantially from €5 million to €20 million on a daily average and the repo transaction volume has reached €22 billion from zero three years ago.

 

As far as the benchmark is concerned, the 10-year GGB is currently trading at a yield of around 3.9%, near pre-crisis levels. The 10-year GGB yield was 7.3% at the beginning of 2017. A new 10-year government bond issue is expected to happen before the end of 2019. Apart from its obvious importance for the Greek economy, it is also of direct interest to the pricing of future NPL securitisation products, since their guarantees are calculated on the basis of a basket of Greece’s sovereign CDS premium on the state guarantor.

 

Greece’ sovereign financing profile remains favourable in the medium term. Greece still benefits from a debt structure with extremely long maturities and favourable interest rates. Medium and long-term amortisations remain moderate. Greece also benefits from a large amount of State deposits, which stood at €26.8 billion at the end of 2018 and which, driven by amortisation and without new issuances, is projected to reach €16.1 billion by the end of 2019.

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