Sharp slowdown in sight, but economy generally resilient
After the inflation-induced slowdown of 2023, growth in 2024 will stabilise at a more moderate pace, while retaining a relatively strong performance compared to the European average, supported by resilient growth in tourism and investment. Greece has negligible direct exposure to Russian energy supply, and even to natural gas in general (which represents only 21% of the primary energy mix), but it is highly dependent on imported oil (50% of the energy mix) and foreign manufactured goods given its poorly diversified domestic industry. As a result, the country has borne the brunt of a cost-of-living crisis. Despite recent improvement, unemployment is expected to remain at 11-12%, meaning that even with a durably tight labour market Greek workers remain in a comparatively precarious condition. Moreover, despite minimum wage increases, aggregate nominal wage growth and public support measures are set to expire or, at least, are unlikely to fully compensate inflation. Likewise, exports of goods (refined fuel, food products, pharmaceuticals), which are overwhelmingly reliant on European partners (61% of destinations), are likely to suffer a slowdown. Alongside these headwinds, investment and service exports will constitute the pillars of resilience. The tourism sector continued to break historical records in 2023 and is expected to maintain positive albeit slower growth in 2024. Despite a global economic outlook marred by uncertainty, Greece is expected to retain attractive investment opportunities. The EU’s Recovery and Resilience Facility, of which Greece will be the largest beneficiary in relative terms, with grants and loans amounting to roughly 18% of 2019 GDP over the 2021-2027 period, will ensure sustained demand for sectors such as construction, telecommunications, and renewable energy, while generating positive externalities that strengthen potential output. Likewise, significant progress in structural reforms (fiscal, market flexibility, easing of red tape and bureaucracy, plus consolidation of corporate balance sheets) has provided grounds for stable investor confidence. Greece is a global leader in trans-shipping, and as supply chains regionalise, the eastern Mediterranean’s role as a trade hub is set to intensify. However, the non-negligible probability of a worse-than-expected global energy outlook constitutes an important downside risk.
Sovereign risk lower than suggested in relation to debt levels, but external imbalances still a concern
Superficially, it would seem that Greece is still the fiscal problem child of the EU in that it has by far the highest debt ratio. Concretely, the probability of default is very low in the short term. The maturity structure of Greek sovereign debt is heavily backloaded and is overwhelmingly concessional in nature, making its debt servicing costs very low. At the same time, the state’s liquid asset buffer is estimated at 17% of GDP. Furthermore, it is worth noting the return to a strong primary surplus of 2% of GDP in 2023 (expected to strengthen in 2024 to around 3%), reflecting the windfall tax revenue effect of booming activity, as well as reforms including the perennation of temporary reduction to fiscal transfer programs. Finally, the risk brought about by the ECB’s policy normalisation and the associated rise in sovereign premia is mitigated by the quality of the government’s relationship with European institutions. In absolute terms, Greek debt is much smaller than that of other highly indebted European states such as Italy. Therefore, in the event of a liquidity crunch, the resources necessary to stabilise Greek debt would be modest. Given Greece’s success in following the European Commission’s reform agenda, such support can be expected. Public debt sustainability could become a problem again, but not in the near term. Declining financing needs (expected at around 9% of GDP in 2024, vs 19% in 2021) and low rollover risk further mitigate liquidity risk. Barring a significant fiscal shock, Greek sovereign bonds should soon recover their investment-grade status. The banking system is nearing the end of a long process of healing the scars of the euro crisis. The non-performing loan (NPL) ratio, which was as high as 20% in 2021, was half that in 2022 and is set to reach 5% in 2024, progressively inching closer to the European average of 2%. The large current account deficit is covered by a large share of stable funding (official flows and FDI) but is symptomatic of a diversification deficit in the country’s industry. High dependence on manufactured imports and a handful of service exports (tourism and shipping) leaves the country exposed to deglobalisation shocks.
Mandate of reformist government renewed, détente with turkey
Incumbent centre-right and liberal party New Democracy (ND) swept to victory in the June 2023 elections, securing 40.6% of the vote and obtaining 158 out of 300 seats in Parliament thanks to the 50 bonus seats awarded to the majority. Prime Minister Kyriakos Mitsotakis has therefore secured a second mandate to continue implementing an EU-backed reform and modernisation agenda (electrification of auto fleet, digitization of public services, labor force upskilling, energy efficiency of homes). Opposition parties were weakened across the board, with left-wing Syriza achieving the lowest result for a main opposition party in modern Greek democracy (17% of the vote). Following the Tempi train crash tragedy and the successive mega fires, stronger emphasis is expected to be place on strengthening physical infrastructures, and closer monitoring of public utility privatisation projects (Attica Tollway, Athens Airport). On the geopolitical front, the big challenge will be managing tensions with Turkey. Both countries are at loggerheads over long-standing maritime claim disputes in the Aegean and Eastern Mediterranean seas, as well as the management of refugees. With both Mitsotakis and Turkish president Recep Tayyip Erdo?an reelected in 2023, and following Greece’s swift humanitarian response to the February 2023 earthquake in Turkey, relations are improving between the two countries. Common membership to NATO and warmer relations with the US on both sides are keeping a lid on the risk of conflict.