Parliament budget office sees recovery ahead
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.