Greek economy: The “hot” fronts after the elections

The fronts that the financial staff of the next government will be called upon to face, after the elections, are scorching, as a number of critical problems need to be solved and indeed –  some of them immediately. What is certain is that any issues will be dealt with in the light of the restoration of fiscal rules from 2024, which had been “relaxed” during the pandemic and will remain so until the end of 2023. After all, within the next period it is expected that the Commission will finalize the new framework of the Stability and Development Program. The increase in GDP ia also a big “bet”, as it will outline – among other things – the growth framework on which the Greek economy will move.

Dealing with high prices and inflation

A top issue is dealing with high prices and inflation, especially in food, as their appreciation is running at a double-digit rate for the 13th consecutive month, while they have been on the rise for 22 months, eating away at incomes. It is possible that the contribution of inflation in 2022 (9.5%) contributed to an increase of the GDP in current prices, to reduce the public debt (as a percentage of the GDP and not as an absolute amount that increased), but maintaining it at a level above 4% will cause a lot of problems.

According to the Medium-Term Report presented by the government, inflation is expected to reach 4.5% in 2023 and decelerate to 2.4% in 2024 and 2% in 2025 and 2026. At the same time, the European Commission estimates how it will move to 4.2% this year and 2.4% next year, remaining above the level set by the European Central Bank.

Wages and GDP

The rise in GDP is an important issue, which is expected to be over 2% for this year, especially when it seems that the first figures for tourism show that things will be better than 2022. In addition to the growth of the Greek economy, the rise of incomes is also a key issue. As it turns out, the continuation of price increases has caused a decrease in incomes, as recorded in the latest OECD report. In Greece, the average nominal gross wage in 2022 increased by 1.5% but the average real wage decreased by 7.4% due to inflation of 9.7%, according to the OECD report. Workers in Greece suffered the fourth largest decline in real wages last year among all OECD countries. While in the three-year period 2019-2022, Greece was one of the only two OECD countries in which the nominal wage decreased.

Private debt

A big “thorn” is the growing private debt, which affects small and medium-sized entrepreneurs. The “red” private maturing debt has soared to almost 260 billion. euro moving upwards by approximately 40 billion euros in recent years. At the same time, almost 4 million citizens are in debt to the tax authorities, with around 2 million at risk of facing forced collection measures, ie confiscations and auctions, while 40% of small and medium-sized businesses have overdue debts when the last bad debt settlement expires, except for 4 out of 5 businesses and freelancers, according to public statements of the competent bodies. In addition, 1,412,322 forced collection measures (seizures and auctions) have taken place, while the debtors to whom compulsory measures can be taken reach 2,036,867, while in 2022 518,622 forced debt collection measures (seizures and auctions) were imposed, with the number of records an increase of 104.9% compared to 2021 (253,083).

Public debt

Greece’s public debt is also a “thorn”. It is positive that it decreased in 2022 as a percentage of GDP from 193.3% to 171.3%, which is due to a very large extent also to very high inflation. In fact, the public debt is expected to continue its downward trend, falling to 160.2% of GDP this year and to 154.4% in 2024, according to the Commission’s forecasts. However, the total amount of debt that the Greek State has to repay and for which it has to pay interest (Central Government debt) increased in the same period even more, by 36.3 billion euros, reaching 392.3 billion euros . The fact that Central Government debt is not taken into account as a percentage of GDP is due to the fact that part of it is intra-governmental debt, i.e. debt of the central administration to the bodies of the wider public sector. This category of debt also increased.

Current account balance

A major “thorn” is the low competitiveness of the Greek economy, which is also reflected in the high current account deficit. The Commission predicts that the current account deficit will decrease from an extremely high 11.8% of GDP in 2022 to 9.2% this year and 7.8% in 2024. It is worth noting that the current account deficit 10fold from 2019 until the end of 2022, according to data from the Bank of Greece.

Support measures and primary surplus

In general, fiscal issues will be a top issue, but there is moderate optimism that there will be fiscal space. It is characteristic that the Commission “sees” fiscal room for additional support measures by the new government, as can be seen from the text of its spring forecasts that was made public. In fact, as far as the amount of the primary surplus is concerned, these are more positive than the Greek counterparts.

The above implies that the Greek government has the possibility to take additional measures to support the citizens in 2023. The next government will have room to take measures, as long as the estimates of the European Commission are confirmed

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In particular, the Commission estimates that this year’s primary surplus will reach 1.9% of GDP, when the target of the Stability Program remains at 0.7% and the estimate of the Ministry of Finance, based on the introductory report of the 2023 budget, speaks for 1.1%. This would entail the creation of a fiscal space of just over 2.5 billion euros. This will happen if the target is exceeded, which is expected to be helped by the looming better course of tourism from 2022 and very likely from 2021 as well.

Gas prices

Another critical issue will be the course of natural gas prices. The Commission’s calculations are based on the assumption that the growth rate of the Greek economy will be 2.4% this year. However, the “leaks” of the Ministry of Finance based on the temporary budget execution data with the jump in revenues, but also the rapid de-escalation of natural gas prices to 32 euros per megawatt hour, speak of conditions that will allow the Greek GDP to increase by 3% this year.

It is worth noting that the budget was drawn up assuming an average natural gas price of 120 euros/Mwh. However, its price has fallen below 35 euros/Mwh. As highlighted in the Commission’s report, although the threat of an energy collapse of the bloc with an absolute lack of natural gas has decreased significantly, the evolution of prices remains extremely uncertain.

In a hypothetical scenario where the average price of natural gas was 35 euros per megawatt hour this year, the growth rate would gain almost two additional 2 percentage points, according to relevant factors of the government’s economic staff. At 120 euros per megawatt hour, the annual cost for the 55 million MWh of natural gas consumed by Greece reaches 6 billion euros, at 35 euros, the cost drops to 1.750 billion euros. The difference of 4.250 billion euros is added directly to the GDP, according to a top source of the General State Accounting Office.

Investment grade

Reacquisition of the investment grade is also desired. Greece is expected to proceed with the acquisition of the investment grade after the elections, being the only country in the European Union that is rated lower than it, after losing it about 13 years ago, at the end of 2010. as it appears from analyzes of foreign houses, the issue this is expected to have a happy ending, within the next few months, regardless of the outcome of the national elections. According to Alpha Bank, the early return to fiscal balance, combined with the estimate to achieve a surplus primary result in 2023 and the rapid de-escalation of the debt-to-GDP ratio by 35 percentage points in the last two years, contribute significantly to the achievement of investment grade, possibly even in 2023.

Housing problem

Risismg prices in housing for citizens is also a capital issue. The rise in prices continues, with the most recent figures from the Bank of Greece showing that the sale prices of houses, throughout the country, increased +5.5% between January and March 2023, while correspondingly prices last year had increased by 7 .5%. The problem is even more acute for the poorest households.

According to the OECD, the poorest 20% of Greek households pay 43% (median) of their income in rent. At the same time, a key factor for the evolution of prices is the increase in housing interest rates, as according to analysts the average housing interest rate will reach 6% within 2023, at a time when the cost of living is constantly increasing, as well as the cost energy.

Demographics

Greece also faces an extremely unfavorable demographic profile which may burden the financial result. The share of the working-age population will shrink by almost nine percentage points by 2050, Eurostat forecasts. This is the main reason behind the comparatively weak long-term potential growth, which the European Commission projected at 1.2% for the period 2019 to 2070 in the 2021 Aging Report.

Recovery Fund

The country expects a lot from the funds of the Recovery and Resilience Fund. Therefore, the new government should “run” the milestones in order for there to be a rapid use of resources for the benefit of the Greek economy. Based on the programming, Greece is expected to make a new official request to the Commission for additional loans of 5 billion by the end of the summer. EUR and subsidies of EUR 760 million under REPowerEU. If this is successful, the amount that Greece will receive, together with the funds from the Recovery Fund, increases to 36 billion euros. The amount of 760 million euros can be allocated for investments in the energy sector and in production mainly for private individuals and households, for actions such as, for example, replacing water heaters in homes. According to the timetable set by the European Commission, the member states have the possibility to submit the relevant request until the end of August. 4.143