UBS sees a positive momentum in the Greek economy, estimating growth at 8% for 2021 and 5% for 2022, thanks in part to the recovery of tourism but also the positive effect of the EU’s Recovery and Resilience Facility funds. In an interview with Naftemporiki, Themis Themistocleous, Head, EMEA Investment Office warns, however, that the risks from the impact of the pandemic and the energy price increases persist.
UBS expects two interest rate hikes by the ECB this year, in September and December, with Mr. Themistocleous pointing out that the ending of PEPP will be even more important for Greece. He also explains what it would take for Greece to get to investment grade and how our country could attract more foreign investments.
The Greek economy grew rapidly in 2021. However it now faces the twin threat of a pandemic and explosive energy price hikes. How high would you set the bar for this year’s GPD growth?
We expect GDP growth in 2021 to have been around 8%, nearly double market expectations of 4.5% at the beginning of the year. In 2022 growth could potentially be as strong as 5.0%, boosted by the RRF funds, labour market recovery, rebounding tourism and improving credit backdrop.
First, Greece is a major beneficiary of EU's Recovery and Resilience Facility fund. It has already submitted its request to the European Council for the EUR 3.6bn disbursement from the RRF in early January, and a decisions should be reached in the next couple months. Assuming the approval is received timely, the benefits to the economy are likely to be felt in the second half of 2022.
Second, we expect further progress on the employment front, especially once all the Covid restrictions are removed.
Third, assuming a more normal tourism season with less or no travel restrictions, we expect tourism revenues to further recover from EUR10.5bn in 2021 to a level of EUR14-15bn. This would still be below the peak levels achieved in 2019 of EUR18bn.
Finally, the banking sector has made a lot of progress during the last few years, both on reducing non-performing exposure (NPE) and in building capital, both key requirements before they can rump up lending. During 2021 we have already seen the first sings on an improvement in both credit demand and credit supply. We should see a more pronounced recovery in both during 2022 and beyond.
But as you said, there are also significant risks. The impact from the pandemic might drag on, depressing demand, especially in services including tourism. However, at this stage we expect the impact to be limited to the first quarter, and it is worth noting that economies in general learned to cope with the pandemic much better.
The risk from persistently higher energy prices is two-fold: it can reduce discretionary spending and it can lead to government subsidies, money that could have gone into different, more productive investments. We expect oil prices to range between US$90-100/bbl in 2022, so I am sure there will be some impact on the economy.
Overall we are positive on the outlook for the Greek economy, and we expect growth to be well above trend, with the positive momentum carrying into 2023.
Christine Lagarde acknowledged that euro zone inflation is running hotter than expected and with risks tilted to the upside. And markets signal expectations of at least two ECB rate rises in 2022. How soon do you think we will see the interest rates rise?
We are in agreement with the market and we are now also expecting two interest rate hikes in the current year (in September and December), and another three next year following the very hawkish comments by the ECB. Inflation has been surprising on the upside, and it is possible that the next published ECB forecasts (in March) can show inflation staying above 2% through to the end of next year. Such a forecast would satisfy the ECB’s condition for raising rates. However, President Lagarde emphasised the sequencing of ending QE before they raise rates. We expect PEPP to end in March and APP to be phased down to zero by end of August. But with yields moving higher and financial conditions tightening, the ECB might decide to delay the first increase to later in the year, especially if by then there are still no significant signs on labour wage inflation and if inflation is showing signs of easing off.
But for Greece the ending of PEPP in March might be even more important than what happens to interest rates. Greek bonds qualified for the PEPP but not for the APP. ECB confirmed in December that it will use PEPP reinvestments to support Greek government bonds, but if we get an accelerated tapering of bond purchases, reinvestments might also end earlier, removing a key support for Greek bonds, potentially leading to wider spreads.We might already be seeing some of the concerns reflected in the Greek bond yields in the last couple of weeks, which spiked from less than 1.5% in January to nearly 2.5% now. President Lagarde re-iterated earlier in the week that the ECB would “use any tools, any instruments to make sure that our monetary policy is properly transmitted throughout the whole euro area, to all member states.”. But the market might want to see tangible evidence of such actions.
Greek bonds are still in junk territory. What should the country do to get to investment grade and how soon could it get there?
Greece’s debt ratio peaked in 2020 at more than 210% of GDP. Despite further, high fiscal deficits in 2021, the rebound in economic growth and higher than- anticipated inflation have helped to lower the country’s debt ratio to closer to 200%. Further progress from here would require a substantially lower deficit in 2022 and moving back into primary surpluses from 2023 onwards.
Rating agencies will likely want to see fiscal discipline and a trajectory towards sustainable primary surpluses. I addition, continuation of reforms and the speed of the deployment of RRF funds in order to support the economy, would be another important consideration.
We believe that returning to pre-pandemic debt ratios of around 185% of GDP and achieving a further gradual reduction from there will likely only be feasible from 2024 (best case end of 2023). Under these assumptions we could see one of the rating agencies upgrading Greece to investment grade during 2023, but in order to achieve an average investment grade across the four major credit agencies, which would allow it to be included in the key bond indices, this is more likely to be achieved in 2024 or later, depending on the progress during that period. is only partially in the hands of the Greek government, in the sense that the pandemic and other external risks can weigh on the progress. In a benign economic environment the rating trend should evolve as described above. Upside surprises can pull it forward by about half a year, while substantial economic downside scenarios can also push it out by years.
How do you assess the developments in the Greek banking sector?
The sector made significant progress over the last couple of years, especially during 2021. Non performing exposure ratio for the four systemic banks declined from around 50% at the peak to around 16% by Sept last year, through a combination of securitization and portfolio sales. And the majority of the systemic banks are likely to get this ratio down to below 10% by the end of this year, or maybe even earlier. Also following a series of measures, the balance sheet has also been repaired and Core Equity Tier 1 capital at >10% for most of the banks should allow them to start lending, and we saw the first signs already in 2021.
A persistent “thorn” for the Greek economy is the so-called "investment gap". How could we attract more investment from abroad?
We started to see the first signs of a pick-up in foreign investments during 2021. Foreign investors are looking for easy of doing business, certainty, continuity and attractive economic conditions. Greece has made a lot of progress in implementing reforms, including areas such as privatisations, digitalization and simplification of investment licensing legislation.Reforms are ongoing and further tangible progress would help. A stronger economic outlook could also entice foreign investors, and as we discussed earlier, at least the near term looks very promising, and the reforms could help with the longer-term outlook. But with elections in the horizon again, foreigninvestors would want to see continuity, irrespective of who is in government. Overall I would expect a pick-up in foreign investments in the current year and beyond, but Greece has a long way to catch up with other European countries to close the investment gap, and how much of that materializes, would be dependent on the factors mentioned earlier.
