Par­lia­ment bud­get of­fice sees re­cov­ery ahead

Financial Mirror (Cyprus) - - FRONT PAGE -

In its lat­est quar­terly re­port pub­lished on Mon­day, the Par­lia­men­tary Bud­get Of­fice (PBO) ar­gues that the econ­omy could grow by more than ex­pected this year but that a se­ries of con­cerns, in­clud­ing bank stress tests, un­paid taxes, lack of struc­tural re­forms and stag­nant ex­ports could yet weigh on the re­cov­ery.

The PBO es­ti­mates that the eco­nomic re­cov­ery this year may be stronger than the of­fi­cially an­tic­i­pated 0.6%, reach­ing 0.9 to 1% thanks largely to tourism. This fore­cast is also sup­ported by the evo­lu­tion of con­sumer con­fi­dence and re­tail sales, ac­cord­ing to the eco­nomic pol­icy site MacroPo­lis.gr.

Nev­er­the­less, the PBO un­der­scores that the key is­sue is the vi­a­bil­ity of the eco­nomic ex­pan­sion, which is pre­req­ui­site for the achieve­ment of the high pri­mary sur­pluses en­vis­aged in the Medium-Term Fis­cal Strat­egy, par­tic­u­larly for the 2016 and be­yond.

Tourism and con­sump­tion de­pend on sev­eral con­junc­tural and ex­ter­nal fac­tors, which are nec­es­sary but not suf­fi­cient con­di­tions for vi­able growth, the PBO adds

It notes that the un­em­ploy­ment rate has started show­ing a down­ward, yet weak, trend. Nev­er­the­less, it reit­er­ates that tack­ling un­em­ploy­ment will take many years even if Greece shows growth rates sim­i­lar to those of the pre­vi­ous 20 years, when 45,000 new jobs were cre­ated each year.

On Greek banks, the PBO un­der­scores two key chal­lenges: the first re­lates to the mount­ing NPL ra­tio, which ac­cord­ing to the IMF is one of the big­gest in the world, higher than that of other coun­tries with sys­temic crises.

The sec­ond in­volves banks’ cap­i­tal ra­tios, which have been boosted by the cap­i­tal in­creases of 8.3 bln eu­ros and now stand at the high end in the EU. Nev­er­the­less, they may not prove ad­e­quate in the up­com­ing ECB stress tests, ac­cord­ing to the PBO, mainly be­cause it could use dif­fer­ent as­sump­tions to those of the Bank of Greece in the tests it con­ducted last year.

The re­port high­lights that the un­cer­tainty sur­round­ing the fu­ture stress tests in con­junc­tion to heighted NPLs and full im­ple­men­ta­tion of Basel III cap­i­tal re­quire­ments make Greek banks re­luc­tant to pro­vide liq­uid­ity to the pri­vate sec­tor and thus de­cel­er­ates the coun­try’s growth prospects.

Ex­ports re­main stag­nant, de­spite ini­tial es­ti­mates of a rise based on the im­prove­ment of Greek cor­po­rates’ com­pet­i­tive­ness. The PBO stresses that although Greece man­aged to in­crease its com­pet­i­tive­ness (re­lated to labour cost), it did not carry out the nec­es­sary struc­tural re­forms in the prod­uct mar­kets and the pub­lic sec­tor op­er­a­tions.

Although Greece man­aged to show a cur­rent ac­count (C/A) sur­plus of 0.7% of GDP in 2013, this is mainly at­trib­uted to an im­prove­ment in the ser­vices’ bal­ances, on higher than ex­pected tourism and ship­ping re­ceipts, and a drop in do­mes­tic de­mand and im­ports. The re­port high­lights that a vi­able growth model re­quires the econ­omy to be­come ex­por­to­ri­ented.

In con­trast, the PBO notes that for­eign di­rect in­vest­ments (FDI) in other coun­tries, such as Ire­land, Spain and Por­tu­gal which also faced se­ri­ous eco­nomic prob­lems, have in­creased. The pri­vati­sa­tion pro­cesses un­der­way and the over­all im­prove­ment of eco­nomic cli­mate are ex­pected, ac­cord­ing to the PBO, to con­trib­ute to an in­crease in FDI.

On un­paid tax debt, which reached 6.23 bln eu­ros in the first half of the year and 67.25 bln in­clud­ing year-end 2013 legacy debt, the PBO es­ti­mates it will ac­cel­er­ate in the com­ing months due to the de­ple­tion of tax­pay­ers’ abil­ity to pay more taxes.

In ad­di­tion, the de­lay in the pay­ments of ar­rears to the pri­vate sec­tor and the cre­ation of new ar­rears could end up with a stock at 8.74 bln eu­ros sim­i­lar to that posted in De­cem­ber 2012.

The PBO also iden­ti­fies that the key re­forms that will im­pact the fis­cal ad­just­ment are re­lated to the so­cial se­cu­rity and jus­tice sec­tors. On the in­ad­e­quacy of the ju­di­cial sys­tem in par­tic­u­lar, the PBO re­ports stresses that it re­sults in a re­duc­tion of pri­vate in­vest­ments, FDIs, en­trepreneur­ship and in­ter­na­tional trade, while it in­creases cor­rup­tion.

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