Greece is well on track to exit its bailout program in August 2018, supported by on-going and necessary structural reforms and improving macroeconomic fundamentals. In this context the Greek government submitted its 2018 budget to Parliament yesterday, which by all accounts indicates that the Greek economy has reached a crucial turning point.
The 2018 budget assumes a continuing fiscal outperformance in 2018, calling for a primary surplus of 2.44% of GDP in 2017, after the distribution of a 0.78% social dividend. On this basis the 2017 primary surplus is seen shaping at 3.2%, translating to a standout 1.47% outperformance (ca. €2.6bn) relative to the program target of 1.75%. In terms of 2018, the budget envisions a primary surplus of 3.82% of GDP compared with 3.5% projected under the ESM program, resulting in an extra ca. €400-500mn cushion.
Source: European Commission, Greek Ministry of Finance
Turning to GDP outlook, the Greek government revised down its growth estimate for 2017 to 1.6% from 1.8% incorporated in the draft budget, while slightly increasing the 2018 forecast to 2.5% from 2.4%.
Source: European Commission
The improving outlook, combined with a recent second tapping of markets (i.e. €30bn debt swap which will boost liquidity and smooth maturities) and an expected third following the conclusion of the third review (in-line with the target to build up cash buffer of €12-15bn), align well with the government’s plan of exiting the bailout program in August 2018, ideally without a precautionary line of credit. In addition, the target for privatisation revenues in 2018 stands at €2.74bn (vs. €1.66bn in 2017), comprising of €720mn for completed or on-going tenders (€188mn for gas grid operator DESFA, €300mn for the development of Hellenikon airport, €232mn for Thessaloniki port) and the remainder from new tenders including amongst others sales of stakes in Hellenic Petroleum (€500mn), Athens International Airport (€500mn), OTE (€250mn), PPC (€100mn) and EYDAP (€64mn).
Although much remains to be achieved in terms of prior actions for the third MoU review, underlying trends point to an improvement in investor sentiment, which combined with recent and further easing of capital controls, on-going state arrears clearance, planned privatisations, and discussions on the long-term sustainability of Greece’s debt, are expected to positively assist in achieving a further normalisation of the macroeconomic situation.
Third MoU Review
With just a few days left before official creditors return to Athens (expected for 27 November) to conclude the Staff-Level Agreement (SLA) before the 4 December Eurogroup meeting, it appears that one of the large and difficult prior actions is set to be settled. More specifically, the Greek government and European Commission have reportedly been in negotiations for several weeks over the liberalisation of the energy market, and specifically in relation to the divestment of 40% of the PPC’s lignite-powered units. Press notes that creditors had identified this as one of two issues that have to be agreed before 4 December, otherwise a technical agreement (SLA) would not be possible. On a positive note, press notes that the matter has now been resolved and that a deal has been reached between Athens and the Directorate-General for Competition in Brussels, which will include the sale of the Megalopolis 3 and 4 lignite units, as well as Melitis 1, while a permit to construct the Melitis 2 station will also be made available, as will lignite mines at Achlada, Vevi and Kleidi.
This would leave the start of the e-auctions and out-of-court settlement process as the other matters that needs to be settled before an SLA can be achieved, while on a positive note, the government made progress on the former last week after reaching an agreement with notaries on the legal and operational framework for the auctions. Accordingly, notaries are due to officially call off their strike in the coming days, allowing the first e-auctions to begin on 29 November, an expected crucial component to improving the management of NPLs and in particular deal with strategic defaulters.
Press also notes that if an SLA is achieved by 4 December, the government will then have until late January to legislate and adopt the relevant measures to conclude the review. Around 30% of the prior actions have reportedly been finalised (out of 101 in total), while if the government completes the remaining actions, the decision on the disbursement of the next bailout tranche (ca. €5bn) will reportedly be approved at the Eurogroup meeting scheduled for 22 January 2018 and ideally after the formation of a German government. Importantly, this would leave only a few of prior actions to be completed as part of the fourth and final review in 2018.
Greek Political Front
PASOK President Fofi Gennimata enjoyed a comfortable victory at Sunday’s run-off vote for the centre-left leadership and now faces the task of uniting social democratic forces as a credible political challenge to Syriza and New Democracy. Gennimata reportedly secured almost 57% of the vote, beating her opponent and MP Nikos Androulakis (likely to secure him a prominent position in the new political body). As noted Gennimata will have to find a way to convince voters that the new political body is not just PASOK in disguise, but will be a force to unite social democratic forces, and in all likelihood will have to find a way to involve centrist party To Potami, whose leader Stavros Theodorakis came fourth in the first round, and Athens Mayor Giorgos Kaminis, who took third place. Press is reporting that Gennimata must ensure she is able to retain the support of those who voted for the two non-PASOK candidates and show that the new alliance will be inclusive as well as progressive.
In the below chart is evident that despite the positive outcome of the second review and the positive feedback from EU regarding the progress of fulfilling prior actions under the third review, Syriza is still struggling to close the gap with New Democracy. New Democracy has established on average a 10.0% lead over the last 1.5 years over Syriza in all opinion polls, while notably, the junior coalition party Independent Greeks has been unable to secure the minimum 3.0% threshold required to remain in the Greek Parliament in the majority of the opinion polls since early 2016.
Source: University of Macedonia, Pulse
A potential read through is that the newly-elected leader could be encouraged by the participation in the first ballot, which exceeded expectations by reaching just over 210,000. The turnout was also higher than many thought in the second round, when approximately 156,000 voters took part. Pollsters have reportedly suggested that if these figures are extrapolated in a national election scenario, than support for the new group could reach double figures, which is roughly what the combined support for PASOK and To Potami reaches in current opinion polls. Accordingly, this level of backing could put the prospective alliance in a strong position at the next elections, especially if New Democracy, which currently has a comfortable lead in the opinion polls, fails to gain an outright majority, hence opening the way for the formation of a governing coalition. Despite there being no such indication of the PASOK leader leaning either towards Syriza or New Democracy, the subject is likely to dominate discussions during the creation of the new political body led by Gennimata. Press is also reporting that PM Alexis Tsipras will hope that a rejuvenated centre-left may make a useful political ally in the future, while by all accounts it appears that the government will not call early elections in view of securing debt relief and a successful exit to Greece’s bailout program in August 2018.
Overall, strong fiscal performance and improving growth dynamics combined with an expected successful completion of the third MoU review, point to Greece’s economy entering a new phase which, combined with low political risk and a strong political drive, sets the scene for positive developments in 2018.