DBRS Ratings GmbH (DBRS Morningstar) upgraded the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings from BB (high) to BBB (low). At the same time, DBRS Morningstar upgraded the Hellenic Republic’s Short-Term Foreign and Local Currency – Issuer Ratings from R-3 to R-2 (middle). The trends on all ratings remain Stable.
EY CREDIT RATING CONSIDERATIONS
The upgrade reflects DBRS Morningstar’s view that, in line with Greece’s impressive track record, the Greek authorities will remain committed to fiscal responsibility, ensuring that the public debt ratio stays on a downward trend. Energy-related support measures did not prevent the primary fiscal balance from reaching a surplus of 0.1% of GDP in 2022. A surplus of 1.1% is expected this year and of 2.1% in 2024. Since its peak in 2020 the public debt ratio has declined by 35 percentage points (pp.), of which 23 pp. last year, benefiting from fiscal repair and strong nominal GDP growth. The significant improvement in fiscal and debt outcomes is bolstered by Greece’s government’s strong commitment to the implementation of a prudent fiscal plan that drives the rating upgrade.
Despite the challenging economic conditions in 2022, the Greek economy showed resilience, growing by 5.9% with also ongoing improvements in the labour market, supported by strong private consumption and investment and a rebound in the tourism sector. As the Recovery and Resilience Plan (RRP or Greece 2.0) continues to be implemented, investment will remain an important source of growth, although there are external downside risks. Improved creditworthiness also reflects a strengthening in cooperation with the European Union (EU) and the euro system institutions, coming from past fiscal consolidation and reforms. As a result, Greece continues to benefit from strong support and financing benefits at times of crises, especially with the new EU/euro system tools and instruments that have evolved in recent years. Improvements in the “Fiscal Management and Policy” and “Debt and Liquidity” building blocks are the key reasons for the rating upgrade.
Greece’s BBB (low) ratings and the stable trend are underpinned by its EU and euro area membership and by the implementation of past economic reforms that have enhanced the resilience of the economy. The country continues to make progress on the execution of its RRP, which consists of reforms that will boost inclusive growth and investment, thereby narrowing the investment gap between Greece and its euro area peers. DBRS Morningstar takes the view that EU resources will continue to provide incentives for the implementation of growth enhancing reforms, while supporting investment growth with funds also channeled through the strengthened banking system. The ratings are constrained by the economic legacies inherited from Greece’s prolonged crisis, namely, the very high public debt ratio, still sizeable level of non-performing loans (NPLs) and the high unemployment rate.
CREDIT RATING DRIVERS
The ratings could be upgraded if one or a combination of the following occur: (1) continued implementation of reforms that boost investment, thereby improving longer term economic prospects; (2) sustained commitment to fiscal responsibility, leading to a durable reduction in the public debt ratio. Potential triggers for a downgrade include one or a combination of the following: (1) a prolonged weakening of fiscal discipline that puts the public debt ratio on a sustained upward trend (2) a reversal in structural reforms; (3) renewed financial-sector instability.
CREDIT RATING RATIONALE
New Government Secures Policy Continuity Which Bolsters RRP Implementation and in Turn, Supports the Economy
After two consecutive general elections, in June 2023, the New Democracy (ND) party secured an absolute parliamentary majority. The election result brings another period of political stability to Greece and secures policy continuity (Please see Greece: Election Result Secures Policy Continuity https://www.
Investment Growth is Driving Economic Performance this Year
After experiencing a strong rebound in 2021, the Greek economy continued on a solid footing in 2002 with real GDP expanding by 5.9%, outpacing the EU and the euro area averages. In 2021, the economy grew by 8.4%, supported by strong investment and export growth as well as pent-up private consumption. The economy remained strong in 2022 posting 5.9% real GDP growth driven by ongoing improvements in the labour market, and government support measures. This year, growth is projected to moderate, although to exceed 2.0% as solid tourism revenues and accelerating investment activity will support the economy. In its Stability Programme 2023, the government forecasts GDP growth of 2.3% this year, driven mainly by investment. Supported also by the Recovery and Resilience Funds (RRF), investment spending has been rising since 2019, increasing the share of investment in GDP from 10.7% to 13.7% at the end of 2022. In DBRS Morningstar’s view the implementation of past reforms has enhanced the resilience of the Greek economy.
Greece continues to make good progress with the implementation of the Greece 2.0 plan by utilizing both the grant and the loan component of the NGEU. This is helping also to increase the capital stock, which in 2022 turned positive, the first time since 2009. Thus far, Greece has received EUR 5.75 billion of grants and EUR 5.35 billion for the loan component. At the end of August, the government requested to modify its plan and to add additional fund under the REPowerEU chapter. The total envelope is expected to reach almost EUR 36 billion for reforms and investments, which is projected to help close the investment gap between Greece and its EU peers and improve growth prospects. This constitutes a contributing factor to the credit improvements In DBRS Morningstar’s view. The deployment of EU funds, if combined with the implementation of structural reforms, will improve Greece’s growth prospects and warrants a positive qualitative adjustment to the “Economic Structure and Performance” building block assessment. Furthermore, the outcome of the June 2023 election result will bring another four years of political stability, allowing the government to proceed apace with reforms and investments.
Fiscal Position Improved in 2022, Commitment to Fiscal Responsibility is a Key Contributing Factor to the Credit Improvement
Since 2009, Greece went through an unprecedented fiscal adjustment, with the cumulative improvement in the primary balance exceeding 14 pp. by 2019. After years of fiscal overperformance, Greece recorded high deficits in 2020 and 2021 due to the deep economic contraction and the support measures to weather the economic impact of the pandemic. The fiscal deficit stood at 9.7% of GDP in 2020, the third largest in the EU, before narrowing to 7.1% of GDP in 2021. Last year, fiscal accounts recorded a marked improvement with the primary balance turning into a small surplus of 0.1% of GDP. In 2023, prudent fiscal policies and positive growth are expected to result in a primary fiscal surplus of 1.1% of GDP. DBRS Morningstar takes the view that Greece will maintain its commitment to fiscal responsibility. In its Stability Programme 2023, the government forecasts primary surpluses over 2% of GDP from 2024 until 2026.
Although receded, risks to the fiscal outlook remain and are related to slower growth that could lead to a weaker fiscal revenues, the evolution of the energy crisis that could result in additional spending arising from higher energy prices than currently foreseen, and the activation of state guarantees that were granted during the pandemic.
Public Debt Remains the Highest in the Euro Area, But Favourable Structure and Declining Interest Costs Mitigate the Risks
Greece’s debt-to-GDP ratio peaked at 206.4% of GDP in 2020 before declining to 171.3% in 2022, due to the improved fiscal outcomes and high nominal GDP growth. In its 2023 State Budget, the government envisages the public debt ratio to continue on its downward trend falling to 162.6 % in 2023, recording a 43.8 percentage point decline since 2020 and falling below 2012 levels. Greek 10-year government bond yields after recording historical low levels in 2021 increased, but have recently fallen below 4%. Several risk mitigating factors are in place related to Greece’s favourable debt structure, as the official sector holds more than 70% of government debt with very long weighted-average maturity of 20 years at end-2022, and with 100% of debt at fixed rates. In addition, the PDMA has in place a proactive debt management strategy using interest rate hedges to mitigate the risk of funding cost increases over the medium term. In 2023, the average effective interest rate on medium to long term debt is expected to stand at 1.2%.
Greece has fully repaid its International Monetary Fund (IMF) loans and prepaid EUR 2.7 billion of the Greek Loan Facility (GLF loans) in 2022. A further early reimbursement is expected by the end of this year. Despite the favourable debt profile, DBRS Morningstar notes that Greece’s debt sustainability relies primarily on its ability to return to and to sustain primary surpluses and on solid nominal GDP growth rates, as in the long run official sector debt will be replaced with market financed debt that will be susceptible to market volatility. The sizeable cash reserves of around EUR 35 billion continue to serve as a liquidity buffer and enhance confidence among market participants. These reserve buffers, combine with the pro-active debt management strategy to achieve the lowest possible interest rate costs, thereby significantly reducing repayment risks, and underpinning the positive qualitative factor in the “Debt and Liquidity” building block. At the same time, in DBRS Morningstar’s view, fiscal responsibility and sustained economic growth are key with respect to Greece’s debt sustainability.
Significant Progress on NPL Reduction, But Higher Interest Rates Could Affect Debtors’ Repayment Capacity
Significant effort has been made in strengthening Greece’s financial sector. The NPL ratio fell to 8.8% at the end of Q1 2023 from 12.1% in Q1 2021, down by 40.3 percentage points since its peak in June 2017. This reduction was primarily driven by sales and securitizations of loans under the Hercules Asset Protection Scheme (HAPS), which expired in October 2022. The asset quality of the Greek banks has continued to improve, driven mainly by organic workout activities. Under the RRF, Greece will draw loans amounting to EUR 12.7 billion, of which EUR 11.7 billion will be channeled through the Greek banks. DBRS Morningstar notes that banks’ effective management and allocation of RRF funds, together with the substantial reduction of NPLs that has taken place, positions banks well to increase the provision of credit to Greek corporates, thereby supporting the economic recovery. Nevertheless, the resolution of private non-performing exposures that were transferred from the banks’ balance sheets to the real economy and are now managed by credit servicing firms (CSFs), remain a key challenge. At the same time, the more difficult macroeconomic and higher interest rate environment could affect banks’ loan portfolios adversely and result in new NPLs. This accounts for DBRS Morningstar’s negative qualitative adjustment in the “Monetary Policy and Financial Stability” building block assessment.
Current Account Widened in 2022, FDI at Record Levels
Lower tourism and high energy import prices led the current account deficit to deteriorate. The improvement in external competitiveness, the rebound in the travel balance and lower energy prices are mitigating factors. The current account deficit widened in 2020 and 2021, reaching 6.6% and 6.8% of GDP respectively, primarily due to the significant deterioration in the travel balance as a result of the pandemic restrictions. Last year, the current account deficit reached 9.7% of GDP due to Greece’s high reliance on energy imports in conjunction with the surge in energy prices. This was despite the strong performance of exports particularly of services, due to the recovery in international tourist flows. Part of the deficit is explained by structural factors related to high energy costs and the green transition and some is cyclical related to pent up demand and the investment cycle, the latter potentially leading to a future structural improvement by building the capacity to further raise exports in the medium term.
The tourism sector recovered strongly in 2022 with international tourist arrivals reaching almost 90% of 2019 levels and travel receipts 99% of the 2019 levels. Foreign tourism continues to perform well this year with international arrivals in the first half of the year exceeding 2019 and 2022 levels. Recent fires on some islands are not expected to have a significant impact on economic activity nor on public finances in 2023, but if subject to high frequency and impact could hamper tourism flows in coming years. The macroeconomic adjustment since 2010 and the labour market reforms of 2012 have improved the external competitiveness of the Greek economy. Greece’s export performance has improved significantly, with Greek exports of goods increasing from 9.0% of GDP in 2010 to around 27% in 2022. Exports of goods and services now represent approximately 50% of GDP from 22% in 2010.
Over the past two years, Greece witnessed a marked increase in inflows of foreign direct investments (FDI), which recorded a two decade high in 2022, reaching EUR 7.2 billion. Increased EU inflows and FDI inflows will provide balance of payments offset to the current account deficit. From a stock perspective, Greece’s net external liabilities stood at high at 141.3% of GDP in 2022 from 171.9% in 2021, mostly driven by the nominal GDP growth. The level is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector.
Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.